American States Water (NYSE:AWR) 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? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating American States Water (NYSE:AWR), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on American States Water is:

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

0.082 = US$138m ÷ (US$1.8b - US$113m) (Based on the trailing twelve months to March 2021).

So, American States Water has an ROCE of 8.2%. On its own that's a low return, but compared to the average of 4.6% generated by the Water Utilities industry, it's much better.

View our latest analysis for American States Water

Above you can see how the current ROCE for American States Water compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering American States Water here for free.

What Can We Tell From American States Water's ROCE Trend?

The returns on capital haven't changed much for American States Water in recent years. The company has employed 37% more capital in the last five years, and the returns on that capital have remained stable at 8.2%. 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.

Our Take On American States Water's ROCE

Long story short, while American States Water has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 123% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

American States Water does have some risks though, and we've spotted 1 warning sign for American States Water that you might be interested in.

While American States Water may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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