What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. 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 Chesapeake Utilities (NYSE:CPK), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Chesapeake Utilities, this is the formula:

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

0.075 = US$137m ÷ (US$2.1b - US$287m) (Based on the trailing twelve months to June 2022).

Thus, Chesapeake Utilities has an ROCE of 7.5%. 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'd like, you can check out the forecasts from the analysts covering Chesapeake Utilities here for free.

How Are Returns Trending?

The returns on capital haven't changed much for Chesapeake Utilities in recent years. The company has consistently earned 7.5% for the last five years, and the capital employed within the business has risen 86% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Chesapeake Utilities' ROCE

In summary, Chesapeake Utilities has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 76% 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.

Chesapeake Utilities does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

While Chesapeake Utilities 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.

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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.