If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Algonquin Power & Utilities (TSE:AQN), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Algonquin Power & Utilities is:

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

0.028 = US$479m ÷ (US$18b - US$1.2b) (Based on the trailing twelve months to March 2024).

Thus, Algonquin Power & Utilities has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Integrated Utilities industry average of 4.9%.

View our latest analysis for Algonquin Power & Utilities

In the above chart we have measured Algonquin Power & Utilities' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Algonquin Power & Utilities .

What The Trend Of ROCE Can Tell Us

In terms of Algonquin Power & Utilities' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 4.0% over the last five years. 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 On Algonquin Power & Utilities' ROCE

In summary, Algonquin Power & Utilities is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 35% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.