Returns On Capital At Black Hills (NYSE:BKH) Paint An Interesting Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Black Hills (NYSE:BKH), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Black Hills:

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

0.056 = US$412m ÷ (US$7.7b - US$385m) (Based on the trailing twelve months to June 2020).

Thus, Black Hills has an ROCE of 5.6%. On its own, that's a low figure but it's around the 5.3% average generated by the Integrated Utilities industry.

Check out our latest analysis for Black Hills

In the above chart we have measured Black Hills' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Black Hills.

So How Is Black Hills' ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 7.1% five years ago, while the business's capital employed increased by 89%. That being said, Black Hills raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Black Hills probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

What We Can Learn From Black Hills' ROCE

To conclude, we've found that Black Hills is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 48% 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.

Black Hills does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

While Black Hills isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

This article by Simply Wall St is general in nature. 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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