California Water Service Group (NYSE:CWT) Is Reinvesting At Lower Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think California Water Service Group (NYSE:CWT) 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)

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 California Water Service Group, this is the formula:

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

0.022 = US$82m ÷ (US$4.0b - US$381m) (Based on the trailing twelve months to September 2023).

Thus, California Water Service Group has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Water Utilities industry average of 4.1%.

See 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 to see what analysts are forecasting going forward, you should check out our free report for California Water Service Group.

So How Is California Water Service Group's ROCE Trending?

On the surface, the trend of ROCE at California Water Service Group doesn't inspire confidence. To be more specific, ROCE has fallen from 5.1% over the last five years. However it looks like California Water Service Group 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 California Water Service Group's ROCE

To conclude, we've found that California Water Service Group is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 23% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to know some of the risks facing California Water Service Group we've found 4 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

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.