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What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 briefly looking over the numbers, we don't think York Water (NASDAQ:YORW) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. Analysts use this formula to calculate it for York Water:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = US$29m ÷ (US$621m - US$19m) (Based on the trailing twelve months to September 2024).
Thus, York Water has an ROCE of 4.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.8%.
See our latest analysis for York Water
In the above chart we have measured York Water's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering York Water for free.
How Are Returns Trending?
The trend of ROCE doesn't look fantastic because it's fallen from 6.5% five years ago, while the business's capital employed increased by 75%. That being said, York Water raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. York Water probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.
The Key Takeaway
To conclude, we've found that York Water is reinvesting in the business, but returns have been falling. Since the stock has declined 21% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.