Here's What's Concerning About SJW Group's (NYSE:SJW) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. 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 SJW Group (NYSE:SJW) 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)

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 SJW Group, this is the formula:

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

0.046 = US$164m ÷ (US$3.8b - US$308m) (Based on the trailing twelve months to September 2023).

Thus, SJW Group has an ROCE of 4.6%. On its own, that's a low figure but it's around the 4.3% average generated by the Water Utilities industry.

View our latest analysis for SJW Group

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

What The Trend Of ROCE Can Tell Us

In terms of SJW Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 6.3%, but since then they've fallen to 4.6%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On SJW Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that SJW Group is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 13% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

SJW Group does have some risks, we noticed 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While SJW 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.