Why You Should Care About Watsco's (NYSE:WSO) Strong Returns On Capital
Watsco (NYSE: WSO) has shown strong returns on capital employed (ROCE), currently at 20%, significantly above the industry average of 11%. Over the past five years, Watsco has maintained this 20% ROCE while increasing its capital employed by 83%. This consistent performance has resulted in a 96% return for shareholders over the same period. Despite its strengths, potential investors should be aware of existing risks associated with the company.
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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, when we ran our eye over Watsco's (NYSE:WSO) trend of ROCE, we really liked what we saw.
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Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Watsco is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$740m ÷ (US$4.7b - US$1.1b) (Based on the trailing twelve months to June 2025).
Therefore, Watsco has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 11%.
See our latest analysis for Watsco
Above you can see how the current ROCE for Watsco compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Watsco for free.
What The Trend Of ROCE Can Tell Us
We'd be pretty happy with returns on capital like Watsco. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 83% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.
What We Can Learn From Watsco's ROCE
Watsco has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Therefore it's no surprise that shareholders have earned a respectable 96% return if they held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
Watsco does have some risks though, and we've spotted 1 warning sign for Watsco that you might be interested in.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
