Yahoo Finance Investors Shouldn't Overlook The Favourable Returns On Capital At Otis Worldwide (NYSE:OTIS)
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Otis Worldwide's (NYSE:OTIS) ROCE trend, we were very happy with what we saw.
Understanding 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 Otis Worldwide:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.39 = US$2.2b ÷ (US$12b - US$6.2b) (Based on the trailing twelve months to March 2022).
Therefore, Otis Worldwide has an ROCE of 39%. That's a fantastic return and not only that, it outpaces the average of 9.9% earned by companies in a similar industry.
See our latest analysis for Otis Worldwide
Above you can see how the current ROCE for Otis Worldwide 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 Otis Worldwide.
How Are Returns Trending?
We'd be pretty happy with returns on capital like Otis Worldwide. Over the past four years, ROCE has remained relatively flat at around 39% and the business has deployed 36% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Otis Worldwide can keep this up, we'd be very optimistic about its future.
Another thing to note, Otis Worldwide has a high ratio of current liabilities to total assets of 53%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Otis Worldwide's ROCE
In short, we'd argue Otis Worldwide has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. However, over the last year, the stock hasn't provided much growth to shareholders in the way of total returns. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
One more thing: We've identified 2 warning signs with Otis Worldwide (at least 1 which is a bit concerning) , and understanding these would certainly be useful.
Otis Worldwide 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.
