Here's What's Concerning About American Water Works Company's (NYSE:AWK) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at American Water Works Company (NYSE:AWK) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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)

0.054 = US$1.4b ÷ (US$28b - US$2.8b) (Based on the trailing twelve months to December 2022).

Thus, American Water Works Company has an ROCE of 5.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.5%.

View our latest analysis for American Water Works Company

Above you can see how the current ROCE for American Water Works Company compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

SWOT Analysis for American Water Works Company

The Trend Of ROCE

On the surface, the trend of ROCE at American Water Works Company doesn't inspire confidence. To be more specific, ROCE has fallen from 7.2% over the last five years. However it looks like American Water Works Company might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On American Water Works Company's ROCE

Bringing it all together, while we're somewhat encouraged by American Water Works Company's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 93% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

American Water Works Company does have some risks, we noticed 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.