American Water Works Company (NYSE:AWK) Has Some Way To Go To Become A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at American Water Works Company (NYSE:AWK) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for American Water Works Company, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.059 = US$1.7b ÷ (US$33b - US$3.2b) (Based on the trailing twelve months to December 2024).

Therefore, American Water Works Company has an ROCE of 5.9%. On its own, that's a low figure but it's around the 5.0% average generated by the Water Utilities industry.

Check out our latest analysis for American Water Works Company

In the above chart we have measured American Water Works Company's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for American Water Works Company .

What Does the ROCE Trend For American Water Works Company Tell Us?

In terms of American Water Works Company's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 5.9% for the last five years, and the capital employed within the business has risen 44% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From American Water Works Company's ROCE

Long story short, while American Water Works Company has been reinvesting its capital, the returns that it's generating haven't increased. And with the stock having returned a mere 28% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing: We've identified 2 warning signs with American Water Works Company (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

While American Water Works Company isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.