Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at California Water Service Group (NYSE:CWT), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for California Water Service Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.022 = US$82m ÷ (US$4.0b - US$381m) (Based on the trailing twelve months to September 2023).
Therefore, California Water Service Group has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 4.5%.
Check out our latest analysis for California Water Service Group
In the above chart we have measured California Water Service Group'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 report for California Water Service Group.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at California Water Service Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.2% from 5.1% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From California Water Service Group's ROCE
Bringing it all together, while we're somewhat encouraged by California Water Service Group's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 25% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you want to know some of the risks facing California Water Service Group we've found 4 warning signs (2 are significant!) that you should be aware of before investing here.
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.
