Here's What To Make Of American States Water's (NYSE:AWR) Decelerating Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at American States Water (NYSE:AWR) and its ROCE trend, we weren't exactly thrilled.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for American States Water, this is the formula:

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

0.087 = US$183m ÷ (US$2.4b - US$321m) (Based on the trailing twelve months to September 2024).

Thus, American States Water has an ROCE of 8.7%. On its own that's a low return, but compared to the average of 4.8% generated by the Water Utilities industry, it's much better.

See our latest analysis for American States Water

In the above chart we have measured American States Water'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 States Water .

What Does the ROCE Trend For American States Water Tell Us?

In terms of American States Water's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.7% for the last five years, and the capital employed within the business has risen 41% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

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. Unsurprisingly, the stock has only gained 10% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know more about American States Water, we've spotted 3 warning signs, and 1 of them doesn't sit too well with us.

While American States Water 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.