Algonquin Power & Utilities (TSE:AQN) Will Want To Turn Around Its Return Trends

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Algonquin Power & Utilities (TSE:AQN), it didn't seem to tick all of these boxes.

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 Algonquin Power & Utilities is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.029 = US$477m ÷ (US$18b - US$1.5b) (Based on the trailing twelve months to September 2023).

Thus, Algonquin Power & Utilities has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Integrated Utilities industry average of 4.9%.

See our latest analysis for Algonquin Power & Utilities

Above you can see how the current ROCE for Algonquin Power & Utilities compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Algonquin Power & Utilities for free.

So How Is Algonquin Power & Utilities' ROCE Trending?

In terms of Algonquin Power & Utilities' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 4.4%, but since then they've fallen to 2.9%. However it looks like Algonquin Power & Utilities might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Algonquin Power & Utilities' ROCE

Bringing it all together, while we're somewhat encouraged by Algonquin Power & Utilities' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 31% over the last five years, investors may not be too optimistic on this trend improving either. 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.

Algonquin Power & Utilities does have some risks, we noticed 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

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.