Slowing Rates Of Return At Northwest Natural Holding (NYSE:NWN) Leave Little Room For Excitement
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Northwest Natural Holding (NYSE:NWN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. To calculate this metric for Northwest Natural Holding, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.045 = US$188m ÷ (US$4.9b - US$697m) (Based on the trailing twelve months to December 2023).
So, Northwest Natural Holding has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Gas Utilities industry average of 6.2%.
View our latest analysis for Northwest Natural Holding
Above you can see how the current ROCE for Northwest Natural Holding 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 analyst report for Northwest Natural Holding .
What The Trend Of ROCE Can Tell Us
The returns on capital haven't changed much for Northwest Natural Holding in recent years. The company has employed 53% more capital in the last five years, and the returns on that capital have remained stable at 4.5%. 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.
The Bottom Line On Northwest Natural Holding's ROCE
In summary, Northwest Natural Holding has simply been reinvesting capital and generating the same low rate of return as before. And investors appear hesitant that the trends will pick up because the stock has fallen 34% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
On a final note, we found 3 warning signs for Northwest Natural Holding (1 makes us a bit uncomfortable) you should be aware of.
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.
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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.
