Be Wary Of Middlesex Water (NASDAQ:MSEX) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. However, after investigating Middlesex Water (NASDAQ:MSEX), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. To calculate this metric for Middlesex Water, this is the formula:

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

0.038 = US$42m ÷ (US$1.2b - US$121m) (Based on the trailing twelve months to September 2023).

Thus, Middlesex Water has an ROCE of 3.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.1%.

Check out our latest analysis for Middlesex Water

Above you can see how the current ROCE for Middlesex Water compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Middlesex Water here for free.

What Can We Tell From Middlesex Water's ROCE Trend?

In terms of Middlesex Water's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 5.9%, but since then they've fallen to 3.8%. However it looks like Middlesex Water might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Middlesex Water's ROCE

Bringing it all together, while we're somewhat encouraged by Middlesex Water's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 37% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know more about Middlesex Water, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.

While Middlesex Water 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.