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Returns On Capital At Canadian Utilities (TSE:CU) Have Stalled

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·2 min read
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To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Canadian Utilities (TSE:CU), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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)

0.05 = CA$971m ÷ (CA$20b - CA$896m) (Based on the trailing twelve months to March 2021).

So, Canadian Utilities has an ROCE of 5.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.7%.

View our latest analysis for Canadian Utilities

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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 to see what analysts are forecasting going forward, you should check out our free report for Canadian Utilities.

What The Trend Of ROCE Can Tell Us

Over the past five years, Canadian Utilities' ROCE and capital employed have both remained mostly flat. 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 84% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

In Conclusion...

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 18% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing: We've identified 4 warning signs with Canadian Utilities (at least 1 which is significant) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.