If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Select Water Solutions (NYSE:WTTR) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Select Water Solutions:

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

0.056 = US$63m ÷ (US$1.3b - US$223m) (Based on the trailing twelve months to September 2024).

So, Select Water Solutions has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 9.5%.

See our latest analysis for Select Water Solutions

In the above chart we have measured Select 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 Select Water Solutions for free.

What Can We Tell From Select Water Solutions' ROCE Trend?

Select Water Solutions has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 23% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

Our Take On Select Water Solutions' ROCE

As discussed above, Select Water Solutions appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 103% 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 Select Water Solutions can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for Select Water Solutions that we think you should be aware of.

While Select Water Solutions 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.