The Returns On Capital At Algonquin Power & Utilities (TSE:AQN) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 Algonquin Power & Utilities (TSE:AQN) 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 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 Algonquin Power & Utilities, this is the formula:

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

0.03 = US$495m ÷ (US$18b - US$1.4b) (Based on the trailing twelve months to March 2023).

So, Algonquin Power & Utilities has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Integrated Utilities industry average of 5.0%.

See our latest analysis for Algonquin Power & Utilities

In the above chart we have measured Algonquin Power & 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 Algonquin Power & Utilities.

SWOT Analysis for Algonquin Power & Utilities

The Trend Of ROCE

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 3.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Algonquin Power & Utilities. In light of this, the stock has only gained 15% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you'd like to know more about Algonquin Power & Utilities, we've spotted 3 warning signs, and 2 of them are concerning.

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.