Yahoo Finance Aris Water Solutions (NYSE:ARIS) Shareholders Will Want The ROCE Trajectory To Continue
What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Aris Water Solutions (NYSE:ARIS) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Aris Water Solutions is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.076 = US$96m ÷ (US$1.4b - US$109m) (Based on the trailing twelve months to March 2024).
Thus, Aris Water Solutions has an ROCE of 7.6%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.9%.
View our latest analysis for Aris Water Solutions
In the above chart we have measured Aris Water Solutions' 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 Aris Water Solutions for free.
What Can We Tell From Aris Water Solutions' ROCE Trend?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 7.6%. The amount of capital employed has increased too, by 52%. So we're very much inspired by what we're seeing at Aris Water Solutions thanks to its ability to profitably reinvest capital.
The Key Takeaway
All in all, it's terrific to see that Aris Water Solutions is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 64% return over the last year. Therefore, we think it would be worth your time to check if these trends are going to continue.
Aris Water Solutions does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...
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.
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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.
