If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Caribbean Utilities Company (TSE:CUP.U), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Caribbean Utilities Company, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = US$31m ÷ (US$668m - US$102m) (Based on the trailing twelve months to June 2022).
Therefore, Caribbean Utilities Company has an ROCE of 5.5%. Even though it's in line with the industry average of 4.5%, it's still a low return by itself.
In the above chart we have measured Caribbean Utilities Company's 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 Caribbean Utilities Company here for free.
What Does the ROCE Trend For Caribbean Utilities Company Tell Us?
Over the past five years, Caribbean Utilities Company's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Caribbean Utilities Company doesn't end up being a multi-bagger in a few years time.
The Bottom Line On Caribbean Utilities Company's ROCE
In summary, Caribbean Utilities Company isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 2.9% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One final note, you should learn about the 2 warning signs we've spotted with Caribbean Utilities Company (including 1 which shouldn't be ignored) .
While Caribbean Utilities Company isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here