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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. With that in mind, we've noticed some promising trends at Duxton Water (ASX:D2O) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
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 Duxton Water, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = AU$17m ÷ (AU$247m - AU$10m) (Based on the trailing twelve months to December 2019).
So, Duxton Water has an ROCE of 7.0%. On its own, that's a low figure but it's around the 6.4% average generated by the Water Utilities industry.
View our latest analysis for Duxton Water
Above you can see how the current ROCE for Duxton Water 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 Can We Tell From Duxton Water's ROCE Trend?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last three years to 7.0%. Basically the business is earning more per dollar of capital invested and in addition to that, 244% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
Our Take On Duxton Water's ROCE
To sum it up, Duxton Water has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 56% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you want to know some of the risks facing Duxton Water we've found 4 warning signs (1 can't be ignored!) that you should be aware of before investing here.