Return Trends At Canadian Utilities (TSE:CU) Aren't Appealing

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Canadian Utilities (TSE:CU), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Canadian Utilities:

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

0.055 = CA$1.1b ÷ (CA$22b - CA$1.3b) (Based on the trailing twelve months to December 2022).

Therefore, Canadian Utilities has an ROCE of 5.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.1%.

See our latest analysis for Canadian Utilities

In the above chart we have measured Canadian 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 Canadian Utilities.

So How Is Canadian Utilities' ROCE Trending?

Things have been pretty stable at Canadian Utilities, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Canadian Utilities to be a multi-bagger going forward. That probably explains why Canadian Utilities has been paying out 79% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

The Bottom Line

In summary, Canadian Utilities isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 41% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we've found 1 warning sign for Canadian Utilities that we think you should be aware of.

While Canadian Utilities may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.