Advanced Drainage Systems (NYSE: WMS) experiences growth in returns on capital

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If you are looking for a multi-bagger, there are a few things to look out for. Ideally, a business will display two trends; first growth to recover on capital employed (ROCE) and on the other hand, an increase amount capital employed. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. With that in mind, we’ve noticed some promising trends at Advanced drainage systems (NYSE: WMS) so let’s look a little further.

Understanding Return on Capital Employed (ROCE)

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for advanced drainage systems:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.17 = $ 349 million ÷ ($ 2.5 billion – $ 407 million) (Based on the last twelve months up to June 2021).

Thereby, Advanced Drainage Systems has a ROCE of 17%. This is a relatively normal return on capital, and it is around the 14% generated by the construction industry.

See our latest review for advanced drainage systems

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Above you can see how the current ROCE of advanced drainage systems compares to its previous returns on capital, but there is little you can say about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for advanced drainage systems.

So what’s the ROCE trend from Advanced Drainage Systems?

The trends that we have noticed at Advanced Drainage Systems are quite reassuring. Over the past five years, returns on capital employed have increased substantially to 17%. Basically the business earns more per dollar of capital invested and on top of that 150% more capital is also being used now. So we’re very inspired by what we’re seeing at Advanced Drainage Systems through its ability to reinvest capital profitably.

Our opinion on the ROCE of advanced drainage systems

A business that increases its returns on capital and can constantly reinvest in itself is a highly desirable feature, and this is what Advanced Drainage Systems offers. And with the stock having performed exceptionally well over the past five years, these trends are being taken into account by investors. Therefore, we believe it would be worth checking out whether these trends will continue.

Like most businesses, advanced drainage systems come with certain risks, and we have found 2 warning signs that you need to be aware of.

If you want to look for solid businesses with great income, check out this free list of companies with good balance sheets and impressive returns on equity.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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