Returns On Capital Signal Tricky Times Ahead For York Water (NASDAQ:YORW)

If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at York Water (NASDAQ:YORW) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.

Understanding Return On Capital Employed (ROCE)

If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on York Water is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.055 = US$22m ÷ (US$421m – US$14m) (Based on the trailing twelve months to June 2021).

So, York Water has an ROCE of 5.5%. In absolute terms, that’s a low return, but it’s much better than the Water Utilities industry average of 4.6%.

NasdaqGS:YORW Return on Capital Employed August 27th 2021

Above you can see how the current ROCE for York 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.

So How Is York Water’s ROCE Trending?

Unfortunately, the trend isn’t great with ROCE falling from 7.4% five years ago, while capital employed has grown 32%. 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. It’s unlikely that all of the funds raised have been put to work yet, so as a consequence York Water might not have received a full period of earnings contribution from it. Additionally, we found that York Water’s most recent EBIT figure is around the same as the prior year, so we’d attribute the drop in ROCE mostly to the capital raise.

The Bottom Line

In summary, York Water is reinvesting funds back into the business for growth but unfortunately it looks like sales haven’t increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 93% over the last five years. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.

On a final note, we’ve found 1 warning sign for York Water that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.

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