If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at TC Energy (TSE:TRP) 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)?
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 TC Energy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = CA$6.5b ÷ (CA$119b - CA$14b) (Based on the trailing twelve months to March 2023).
So, TC Energy has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 19%.
Check out our latest analysis for TC Energy
In the above chart we have measured TC Energy's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
SWOT Analysis for TC Energy
- Dividend is in the top 25% of dividend payers in the market.
- Earnings declined over the past year.
- Interest payments on debt are not well covered.
- Expensive based on P/E ratio and estimated fair value.
- Shareholders have been diluted in the past year.
- Annual earnings are forecast to grow faster than the Canadian market.
- Debt is not well covered by operating cash flow.
- Dividends are not covered by earnings.
- Annual revenue is forecast to grow slower than the Canadian market.
What Does the ROCE Trend For TC Energy Tell Us?
The returns on capital haven't changed much for TC Energy in recent years. Over the past five years, ROCE has remained relatively flat at around 6.2% and the business has deployed 37% more capital into its operations. 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
Long story short, while TC Energy has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly, the stock has only gained 20% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
On a final note, we found 5 warning signs for TC Energy (2 are a bit concerning) you should be aware of.
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.
Valuation is complex, but we're here to simplify it.
Discover if TC Energy might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
About TSX:TRP
Average dividend payer low.
