If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Watts Water Technologies (NYSE:WTS) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Watts Water Technologies:

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

0.19 = US$380m ÷ (US$2.4b - US$425m) (Based on the trailing twelve months to June 2024).

Thus, Watts Water Technologies has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 13% it's much better.

View our latest analysis for Watts Water Technologies

In the above chart we have measured Watts Water Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Watts Water Technologies for free.

What Does the ROCE Trend For Watts Water Technologies Tell Us?

Watts Water Technologies is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 19%. The amount of capital employed has increased too, by 52%. So we're very much inspired by what we're seeing at Watts Water Technologies thanks to its ability to profitably reinvest capital.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Watts Water Technologies has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 1 warning sign with Watts Water Technologies and understanding it should be part of your investment process.

While Watts Water Technologies may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.