Slowing Rates Of Return At MDU Resources Group (NYSE:MDU) Leave Little Room For Excitement

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at MDU Resources Group (NYSE:MDU), it didn't seem to tick all of these boxes.

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. To calculate this metric for MDU Resources Group, this is the formula:

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

0.075 = US$565m ÷ (US$8.6b - US$1.1b) (Based on the trailing twelve months to September 2021).

Thus, MDU Resources Group has an ROCE of 7.5%. On its own that's a low return, but compared to the average of 4.8% generated by the Integrated Utilities industry, it's much better.

See our latest analysis for MDU Resources Group

In the above chart we have measured MDU Resources 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 MDU Resources Group here for free.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at MDU Resources Group. Over the past five years, ROCE has remained relatively flat at around 7.5% and the business has deployed 34% 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.

What We Can Learn From MDU Resources Group's ROCE

In conclusion, MDU Resources Group has been investing more capital into the business, but returns on that capital haven't increased. And with the stock having returned a mere 15% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing to note, we've identified 1 warning sign with MDU Resources Group and understanding it should be part of your investment process.

While MDU Resources 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.

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.

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