There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. 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.
What Is Return On Capital Employed (ROCE)?
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Artesian Resources is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.046 = US$29m ÷ (US$674m – US$33m) (Based on the trailing twelve months to June 2022).
Thus, Artesian Resources has an ROCE of 4.6%. In absolute terms, that’s a low return but it’s around the Water Utilities industry average of 4.3%.
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 Does the ROCE Trend For Artesian Resources 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 4.6% from 6.5% 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 may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line
Bringing it all together, while we’re somewhat encouraged by Artesian Resources’ reinvestment in its own business, we’re aware that returns are shrinking. Since the stock has gained an impressive 66% over the last five years, investors must think there’s better things to come. However, unless these underlying trends turn more positive, we wouldn’t get our hopes up too high.
Since virtually every company faces some risks, it’s worth knowing what they are, and we’ve spotted 2 warning signs for Artesian Resources (of which 1 is a bit unpleasant!) that you should know about.
While Artesian Resources may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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