Returns On Capital At Canadian Utilities (TSE:CU) Paint A Concerning Picture

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Canadian Utilities (TSE:CU), so let's see why.

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Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Canadian Utilities, this is the formula:

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

0.043 = CA$970m ÷ (CA$24b - CA$1.3b) (Based on the trailing twelve months to March 2025).

Thus, Canadian Utilities has an ROCE of 4.3%. In absolute terms, that's a low return but it's around the Integrated Utilities industry average of 5.0%.

Check out our latest analysis for Canadian Utilities

Above you can see how the current ROCE for Canadian Utilities compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Canadian Utilities .

What Can We Tell From Canadian Utilities' ROCE Trend?

We are a bit worried about the trend of returns on capital at Canadian Utilities. To be more specific, the ROCE was 6.1% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Canadian Utilities becoming one if things continue as they have.

What We Can Learn From Canadian Utilities' ROCE

In summary, it's unfortunate that Canadian Utilities is generating lower returns from the same amount of capital. However the stock has delivered a 54% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Canadian Utilities (of which 2 don't sit too well with us!) that you should know about.

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.