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Some Investors May Be Worried About Chesapeake Utilities' (NYSE:CPK) Returns On Capital

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·3 min read
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Having said that, from a first glance at Chesapeake Utilities (NYSE:CPK) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Chesapeake Utilities is:

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

0.07 = US$112m ÷ (US$1.9b - US$329m) (Based on the trailing twelve months to December 2020).

Thus, Chesapeake Utilities has an ROCE of 7.0%. In absolute terms, that's a low return, but it's much better than the Gas Utilities industry average of 5.5%.

View our latest analysis for Chesapeake Utilities


Above you can see how the current ROCE for Chesapeake Utilities 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 Chesapeake Utilities here for free.

What Can We Tell From Chesapeake Utilities' ROCE Trend?

When we looked at the ROCE trend at Chesapeake Utilities, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.7% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

To conclude, we've found that Chesapeake Utilities is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 115% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 2 warning signs for Chesapeake Utilities you'll probably want to know about.

While Chesapeake Utilities isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

This article by Simply Wall St is general in nature. 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.

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