What Do The Returns On Capital At TC Energy (TSE:TRP) Tell Us?
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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating TC Energy (TSE:TRP), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on TC Energy is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = CA$5.7b ÷ (CA$102b - CA$10b) (Based on the trailing twelve months to September 2020).
Thus, TC Energy has an ROCE of 6.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.3%.
View our latest analysis for TC Energy
Above you can see how the current ROCE for TC Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for TC Energy.
How Are Returns Trending?
The returns on capital haven't changed much for TC Energy in recent years. The company has employed 56% more capital in the last five years, and the returns on that capital have remained stable at 6.3%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
Our Take On TC Energy's ROCE
In conclusion, TC Energy has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 60% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One more thing, we've spotted 1 warning sign facing TC Energy that you might find interesting.
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.
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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