The Trend Of High Returns At Advanced Drainage Systems (NYSE:WMS) Has Us Very Interested

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. And in light of that, the trends we're seeing at Advanced Drainage Systems' (NYSE:WMS) look very promising so lets take a look.

What Is 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. To calculate this metric for Advanced Drainage Systems, this is the formula:

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

0.26 = US$699m ÷ (US$3.2b - US$439m) (Based on the trailing twelve months to September 2022).

Therefore, Advanced Drainage Systems has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

Check out our latest analysis for Advanced Drainage Systems

Above you can see how the current ROCE for Advanced Drainage Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Advanced Drainage Systems.

So How Is Advanced Drainage Systems' ROCE Trending?

We like the trends that we're seeing from Advanced Drainage Systems. Over the last five years, returns on capital employed have risen substantially to 26%. Basically the business is earning more per dollar of capital invested and in addition to that, 210% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Our Take On Advanced Drainage Systems' ROCE

In summary, it's great to see that Advanced Drainage Systems can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 361% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Advanced Drainage Systems can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 3 warning signs for Advanced Drainage Systems you'll probably want to know about.

Advanced Drainage Systems is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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