Yahoo Finance Investors Met With Slowing Returns on Capital At Waste Connections (NYSE:WCN)
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Waste Connections (NYSE:WCN), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Waste Connections is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = US$1.4b ÷ (US$19b - US$1.6b) (Based on the trailing twelve months to March 2024).
So, Waste Connections has an ROCE of 8.0%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 9.9%.
See our latest analysis for Waste Connections
In the above chart we have measured Waste Connections' 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 Waste Connections .
How Are Returns Trending?
There are better returns on capital out there than what we're seeing at Waste Connections. The company has consistently earned 8.0% for the last five years, and the capital employed within the business has risen 44% 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.
The Bottom Line On Waste Connections' ROCE
Long story short, while Waste Connections has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 82% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
On a separate note, we've found 2 warning signs for Waste Connections you'll probably want to know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
