Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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 Artesian Resources (NASDAQ:ARTN.A) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 Artesian Resources:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.049 = US$28m ÷ (US$625m - US$48m) (Based on the trailing twelve months to December 2021).

Thus, Artesian Resources has an ROCE of 4.9%. In absolute terms, that's a low return but it's around the Water Utilities industry average of 4.1%.

Check out our latest analysis for Artesian Resources

In the above chart we have measured Artesian Resources' 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 Artesian Resources here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Artesian Resources, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.9% from 6.3% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that Artesian Resources is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 65% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to know some of the risks facing Artesian Resources we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.