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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Water Intelligence (LON:WATR), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Water Intelligence:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.086 = US$6.8m ÷ (US$97m - US$17m) (Based on the trailing twelve months to December 2022).
Therefore, Water Intelligence has an ROCE of 8.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.1%.
Check out our latest analysis for Water Intelligence
Above you can see how the current ROCE for Water Intelligence 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.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Water Intelligence doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.6% from 16% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On Water Intelligence's ROCE
While returns have fallen for Water Intelligence in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 4.8% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
Water Intelligence does have some risks though, and we've spotted 2 warning signs for Water Intelligence that you might be interested in.