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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 Chesapeake Utilities (NYSE:CPK) and its ROCE trend, we weren't exactly thrilled.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Chesapeake Utilities is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.077 = US$127m ÷ (US$2.0b - US$322m) (Based on the trailing twelve months to June 2021).
Therefore, Chesapeake Utilities has an ROCE of 7.7%. On its own that's a low return, but compared to the average of 5.4% generated by the Gas Utilities industry, it's much better.
Check out our latest analysis for Chesapeake Utilities
Above you can see how the current ROCE for Chesapeake Utilities compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Chesapeake Utilities, we didn't gain much confidence. Around five years ago the returns on capital were 9.7%, but since then they've fallen to 7.7%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On Chesapeake Utilities' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Chesapeake Utilities is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 127% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
One more thing, we've spotted 2 warning signs facing Chesapeake Utilities that you might find interesting.