If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Caribbean Utilities Company (TSE:CUP.U) and its ROCE trend, we weren’t exactly thrilled.
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. To calculate this metric for Caribbean Utilities Company, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.052 = US$40m ÷ (US$851m – US$75m) (Based on the trailing twelve months to December 2024).
Therefore, Caribbean Utilities Company has an ROCE of 5.2%. On its own that’s a low return on capital but it’s in line with the industry’s average returns of 5.0%.
Check out our latest analysis for Caribbean Utilities Company
Above you can see how the current ROCE for Caribbean Utilities Company 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 Caribbean Utilities Company for free.
In terms of Caribbean Utilities Company’s historical ROCE trend, it doesn’t exactly demand attention. The company has employed 42% more capital in the last five years, and the returns on that capital have remained stable at 5.2%. 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.
In conclusion, Caribbean Utilities Company has been investing more capital into the business, but returns on that capital haven’t increased. And investors may be recognizing these trends since the stock has only returned a total of 21% to shareholders over the last five years. Therefore, if you’re looking for a multi-bagger, we’d propose looking at other options.
Caribbean Utilities Company does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.