There Are Reasons To Feel Uneasy About Algonquin Power & Utilities' (TSE:AQN) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Algonquin Power & Utilities (TSE:AQN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. 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$480m ÷ (US$18b - US$1.5b) (Based on the trailing twelve months to June 2023).

Therefore, 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 5.1%.

View 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 here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Algonquin Power & Utilities doesn't inspire confidence. Around five years ago the returns on capital were 4.5%, but since then they've fallen to 2.9%. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Algonquin Power & Utilities' ROCE

While returns have fallen for Algonquin Power & Utilities in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Algonquin Power & Utilities does have some risks though, and we've spotted 2 warning signs for Algonquin Power & Utilities that you might be interested in.

While Algonquin Power & Utilities isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.