Yahoo Finance Hydro One (TSE:H) Hasn't Managed To Accelerate Its Returns
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Hydro One (TSE:H), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Hydro One is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = CA$1.9b ÷ (CA$34b - CA$3.5b) (Based on the trailing twelve months to June 2024).
So, Hydro One has an ROCE of 6.1%. In absolute terms, that's a low return, but it's much better than the Electric Utilities industry average of 4.7%.
See our latest analysis for Hydro One
In the above chart we have measured Hydro One'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 analyst report for Hydro One .
What Does the ROCE Trend For Hydro One Tell Us?
In terms of Hydro One's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 6.1% for the last five years, and the capital employed within the business has risen 34% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
What We Can Learn From Hydro One's ROCE
In conclusion, Hydro One has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 123% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
Hydro One does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
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.
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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.
