Hydro One's (TSE:H) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Hydro One's (TSE:H) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Hydro One:

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

0.066 = CA$1.8b ÷ (CA$31b - CA$3.7b) (Based on the trailing twelve months to December 2022).

Thus, Hydro One has an ROCE of 6.6%. On its own that's a low return, but compared to the average of 4.7% 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 to see what analysts are forecasting going forward, you should check out our free report for Hydro One.

The Trend Of ROCE

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 6.6%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 21%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Hydro One's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Hydro One has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Hydro One can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 2 warning signs we've spotted with Hydro One (including 1 which is concerning) .

While Hydro One 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.