Return on Capital Employed (ROCE) is a crucial metric for identifying stocks with the potential to multiply in value over the long term. ROCE measures the return a company generates from the capital employed in its business. While a high ROCE indicates efficient reinvestment of earnings, a low ROCE may suggest otherwise.
Considering Energy Recovery (NASDAQ:ERII), a company that specializes in solutions for seawater reverse osmosis desalination and industrial wastewater treatment, the numbers don’t paint a promising picture. With an ROCE of 6.3%, Energy Recovery underperforms the Machinery industry average of 12%. This low return raises doubts about its potential as a multi-bagger stock.
Although Energy Recovery has been reinvesting in its business and has rewarded long-term shareholders with a 137% return over the past five years, the shrinking returns should be a cause for concern. Over the last five years, the company’s returns on capital employed have decreased from 9.0% to 6.3%. Additionally, despite an increase in capital employed, Energy Recovery’s sales have remained stagnant over the last 12 months.
While the market may hold positive sentiments about Energy Recovery’s future, it is essential to consider the underlying trends. If these trends continue, the likelihood of Energy Recovery becoming a multi-bagger stock appears to be low.
1. What is ROCE?
Return on Capital Employed (ROCE) is a measure of the return generated by a company from the capital employed in its business. It indicates the efficiency of reinvesting earnings.
2. Why is ROCE important for identifying multi-bagger stocks?
A high ROCE suggests that a company is efficiently reinvesting its earnings at an increasing rate of return, making it more likely to experience significant value growth in the long term.
3. What are the risks facing Energy Recovery?
One risk worth noting is the significant insider selling that has occurred over the past three months. It is essential to consider such factors when evaluating the potential of a stock.
4. Is this article financial advice?
No, this article by Simply Wall St is intended to provide commentary based on historical data and analyst forecasts. It does not constitute a recommendation to buy or sell any stock and does not consider individual objectives or financial situations.