Yahoo Finance Investors Met With Slowing Returns on Capital At TC Energy (TSE:TRP)
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at TC Energy (TSE:TRP) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is 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. The formula for this calculation on TC Energy is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = CA$6.5b ÷ (CA$119b - CA$14b) (Based on the trailing twelve months to March 2023).
Therefore, TC Energy has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 19%.
View our latest analysis for TC Energy
Above you can see how the current ROCE for TC Energy 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 TC Energy here for free.
How Are Returns Trending?
There are better returns on capital out there than what we're seeing at TC Energy. Over the past five years, ROCE has remained relatively flat at around 6.2% and the business has deployed 37% 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.
The Bottom Line
As we've seen above, TC Energy's returns on capital haven't increased but it is reinvesting in the business. And investors may be recognizing these trends since the stock has only returned a total of 33% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One final note, you should learn about the 5 warning signs we've spotted with TC Energy (including 2 which are a bit concerning) .
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.
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