Hydro One (TSE:H) Has Some Way To Go To Become A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 investigating Hydro One (TSE:H), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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 Hydro One is:

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

0.062 = CA$1.8b ÷ (CA$31b - CA$2.3b) (Based on the trailing twelve months to March 2023).

Therefore, Hydro One has an ROCE of 6.2%. On its own that's a low return, but compared to the average of 4.6% generated by the Electric Utilities industry, it's much better.

Check out our latest analysis for Hydro One

In the above chart we have measured Hydro One's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hydro One here for free.

SWOT Analysis for Hydro One

What Does the ROCE Trend For Hydro One Tell Us?

The returns on capital haven't changed much for Hydro One in recent years. Over the past five years, ROCE has remained relatively flat at around 6.2% and the business has deployed 27% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

In summary, Hydro One has simply been reinvesting capital and generating the same low rate of return as before. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 123% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Hydro One does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

While Hydro One 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.