California Water Service Group (NYSE:CWT) Has Some Way To Go To Become A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at California Water Service Group (NYSE:CWT) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on California Water Service Group is:

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

0.046 = US$197m ÷ (US$4.8b - US$508m) (Based on the trailing twelve months to March 2024).

Thus, California Water Service Group has an ROCE of 4.6%. In absolute terms, that's a low return but it's around the Water Utilities industry average of 4.3%.

View our latest analysis for California Water Service Group

In the above chart we have measured California Water Service Group'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 California Water Service Group for free.

The Trend Of ROCE

The returns on capital haven't changed much for California Water Service Group in recent years. Over the past five years, ROCE has remained relatively flat at around 4.6% and the business has deployed 70% more capital into its operations. 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.

Our Take On California Water Service Group's ROCE

Long story short, while California Water Service Group has been reinvesting its capital, the returns that it's generating haven't increased. And with the stock having returned a mere 3.6% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with California Water Service Group (including 1 which can't be ignored) .

While California Water Service Group 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.

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