To find a multi-bagger stock, what underlying trends should we look for in a company? In a perfect world, we would like to see a company invest more capital in its business and, ideally, the returns generated from that capital also increase. When you see this, it usually means it is a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we looked at Waste connections (NYSE: WCN) and its ROCE development, we were not exactly thrilled.
Return on Capital Employed (ROCE): What is it?
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a company can generate with the capital employed in its business. Analysts use this formula to calculate it for Waste Connections:
Return on capital = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.084 = $1.5 billion ÷ ($19 billion – $1.8 billion) (Based on the last twelve months to June 2024).
Therefore, Waste Connections has a ROCE of 8.4%. In absolute terms, this is a low return, but it is roughly in line with the industry average for commercial services of 9.6%.
Check out our latest analysis for Waste Connections
In the chart above, we have compared Waste Connections’ ROCE with its past performance, but the future is arguably more important. If you want, you can see the analysts’ forecasts for Waste Connections for free.
What can we learn from Waste Connections’ ROCE trend?
There are better returns on capital than what we see at Waste Connections. Over the last five years, the return on capital has remained relatively stable at around 8.4%, and the company has invested 44% more capital into its operations. This poor return on capital does not inspire confidence at this time, and given the increased capitalization, it is obvious that the company is not investing the funds in high-return investments.
The conclusion
In short, although Waste Connections has reinvested its capital, the earnings it has generated have not increased. However, the stock has delivered an incredible 112% return to long-term shareholders over the past five years, so the market is optimistic about the future. However, unless these underlying trends continue to be positive, we should not get our hopes up too much.
We also found 2 warning signs for sewage connections You probably want to know more about it.
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