Northwest Natural Holding (NYSE:NWN) Hasn't Managed To Accelerate Its Returns

By
Simply Wall St
Published
May 24, 2022
NYSE:NWN
Source: Shutterstock

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Northwest Natural Holding (NYSE:NWN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Northwest Natural Holding is:

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

0.043 = US$146m ÷ (US$4.1b - US$658m) (Based on the trailing twelve months to March 2022).

Therefore, Northwest Natural Holding has an ROCE of 4.3%. On its own, that's a low figure but it's around the 5.3% average generated by the Gas Utilities industry.

Check out our latest analysis for Northwest Natural Holding

roce
NYSE:NWN Return on Capital Employed May 24th 2022

Above you can see how the current ROCE for Northwest Natural Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Northwest Natural Holding here for free.

How Are Returns Trending?

Over the past five years, Northwest Natural Holding's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Northwest Natural Holding doesn't end up being a multi-bagger in a few years time. That probably explains why Northwest Natural Holding has been paying out 71% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

What We Can Learn From Northwest Natural Holding's ROCE

In a nutshell, Northwest Natural Holding has been trudging along with the same returns from the same amount of capital over the last five years. Unsurprisingly, the stock has only gained 1.3% over the last five years, which potentially indicates that investors are accounting for this going forward. 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 Northwest Natural Holding (including 1 which doesn't sit too well with us) .

While Northwest Natural Holding 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.

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