The Returns At Canadian Utilities (TSE:CU) Aren't Growing
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Canadian Utilities (TSE:CU) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for Canadian Utilities, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = CA$1.0b ÷ (CA$23b - CA$1.4b) (Based on the trailing twelve months to December 2023).
Therefore, Canadian Utilities has an ROCE of 4.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.9%.
View our latest analysis for Canadian Utilities
In the above chart we have measured Canadian Utilities' 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 Canadian Utilities for free.
What Does the ROCE Trend For Canadian Utilities Tell Us?
There hasn't been much to report for Canadian Utilities' returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Canadian Utilities doesn't end up being a multi-bagger in a few years time. That probably explains why Canadian Utilities has been paying out 76% of its earnings as dividends to shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.
The Bottom Line
In a nutshell, Canadian Utilities has been trudging along with the same returns from the same amount of capital over the last five years. And investors may be recognizing these trends since the stock has only returned a total of 6.1% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you want to know some of the risks facing Canadian Utilities we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
