Yahoo Finance Some Investors May Be Worried About Canadian Utilities' (TSE:CU) Returns On Capital
When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Canadian Utilities (TSE:CU) we aren't filled with optimism, but let's investigate further.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Canadian Utilities:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.044 = CA$975m ÷ (CA$23b - CA$1.0b) (Based on the trailing twelve months to June 2024).
Therefore, Canadian Utilities has an ROCE of 4.4%. In absolute terms, that's a low return but it's around the Integrated Utilities industry average of 4.9%.
Check out our latest analysis for Canadian Utilities
In the above chart we have measured Canadian Utilities' 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 Canadian Utilities for free.
The Trend Of ROCE
There is reason to be cautious about Canadian Utilities, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 7.1% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Canadian Utilities to turn into a multi-bagger.
On a side note, Canadian Utilities has done well to pay down its current liabilities to 4.5% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
What We Can Learn From Canadian Utilities' ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 16% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
Like most companies, Canadian Utilities does come with some risks, and we've found 3 warning signs that you should be aware of.
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.
