Stock Analysis

Investors Met With Slowing Returns on Capital At Artesian Resources (NASDAQ:ARTN.A)

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NasdaqGS:ARTN.A
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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. However, after briefly looking over the numbers, we don't think Artesian Resources (NASDAQ:ARTN.A) 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Artesian Resources is:

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

0.051 = US$28m ÷ (US$593m - US$44m) (Based on the trailing twelve months to December 2020).

Thus, Artesian Resources has an ROCE of 5.1%. Even though it's in line with the industry average of 4.8%, it's still a low return by itself.

See our latest analysis for Artesian Resources

roce
NasdaqGS:ARTN.A Return on Capital Employed April 28th 2021

In the above chart we have measured Artesian Resources' 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 Artesian Resources here for free.

So How Is Artesian Resources' ROCE Trending?

There are better returns on capital out there than what we're seeing at Artesian Resources. The company has consistently earned 5.1% for the last five years, and the capital employed within the business has risen 34% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Artesian Resources' ROCE

In summary, Artesian Resources has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 66% 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.

If you want to continue researching Artesian Resources, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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What are the risks and opportunities for Artesian Resources?

Artesian Resources Corporation, through its subsidiaries, provides water, wastewater, and other services in Delaware, Maryland, and Pennsylvania.

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Rewards

  • Price-To-Earnings ratio (31.2x) is below the Water Utilities industry average (37.3x)

  • Earnings have grown 5.7% per year over the past 5 years

Risks

  • Debt is not well covered by operating cash flow

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Artesian Resources

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