Returns At Chesapeake Utilities (NYSE:CPK) Appear To Be Weighed Down

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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 briefly looking over the numbers, we don't think Chesapeake Utilities (NYSE:CPK) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. Analysts use this formula to calculate it for Chesapeake Utilities:

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

0.075 = US$145m ÷ (US$2.2b - US$255m) (Based on the trailing twelve months to June 2023).

Thus, Chesapeake Utilities has an ROCE of 7.5%. In absolute terms, that's a low return, but it's much better than the Gas Utilities industry average of 5.4%.

Check out our latest analysis for Chesapeake Utilities

In the above chart we have measured Chesapeake Utilities' 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 Chesapeake Utilities.

What Can We Tell From Chesapeake Utilities' ROCE Trend?

In terms of Chesapeake Utilities' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 7.5% for the last five years, and the capital employed within the business has risen 81% 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.

On a side note, Chesapeake Utilities has done well to reduce current liabilities to 12% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On Chesapeake Utilities' ROCE

In conclusion, Chesapeake Utilities has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 43% 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.

Chesapeake Utilities does have some risks though, and we've spotted 3 warning signs for Chesapeake Utilities that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.