Some Investors May Be Worried About Middlesex Water's (NASDAQ:MSEX) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Middlesex Water (NASDAQ:MSEX), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.045 = US$46m ÷ (US$1.1b - US$88m) (Based on the trailing twelve months to June 2023).

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

View 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 to see what analysts are forecasting going forward, you should check out our free report for Middlesex Water.

So How Is Middlesex Water's ROCE Trending?

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 4.5%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Middlesex Water's ROCE

While returns have fallen for Middlesex Water in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 87% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

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 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.