Here's What's Concerning About Middlesex Water's (NASDAQ:MSEX) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Middlesex Water (NASDAQ:MSEX), we don't think it's current trends fit the mold of a multi-bagger.

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. 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)

0.039 = US$37m ÷ (US$1.0b - US$92m) (Based on the trailing twelve months to September 2021).

Thus, Middlesex Water has an ROCE of 3.9%. Even though it's in line with the industry average of 4.5%, it's still a low return by itself.

See our latest analysis for Middlesex Water

In the above chart we have measured Middlesex Water'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 Middlesex Water here for free.

So How Is Middlesex Water's ROCE Trending?

On the surface, the trend of ROCE at Middlesex Water doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.9% from 7.3% five years ago. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Middlesex Water's ROCE

To conclude, we've found that Middlesex Water is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 160% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

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

While Middlesex Water 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.