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Investors Met With Slowing Returns on Capital At Select Water Solutions (NYSE:WTTR)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Select Water Solutions (NYSE:WTTR) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Select Water Solutions, this is the formula:

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

0.077 = US$77m ÷ (US$1.2b - US$212m) (Based on the trailing twelve months to December 2023).

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Thus, Select Water Solutions has an ROCE of 7.7%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 12%.

See our latest analysis for Select Water Solutions

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Above you can see how the current ROCE for Select Water Solutions 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 analyst report for Select Water Solutions .

So How Is Select Water Solutions' ROCE Trending?

Over the past five years, Select Water Solutions' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Select Water Solutions to be a multi-bagger going forward.

In Conclusion...

In a nutshell, Select Water Solutions has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 16% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Select Water Solutions has the makings of a multi-bagger.

On a separate note, we've found 3 warning signs for Select Water Solutions you'll probably want to know about.

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.

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.