The Returns At Northwest Natural Holding (NYSE:NWN) Aren't Growing

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Northwest Natural Holding (NYSE:NWN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Northwest Natural Holding, this is the formula:

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

0.043 = US$146m ÷ (US$4.1b - US$658m) (Based on the trailing twelve months to March 2022).

Therefore, Northwest Natural Holding has an ROCE of 4.3%. On its own, that's a low figure but it's around the 5.3% average generated by the Gas Utilities industry.

See our latest analysis for Northwest Natural Holding

roce

In the above chart we have measured Northwest Natural Holding's 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 Northwest Natural Holding here for free.

So How Is Northwest Natural Holding's ROCE Trending?

Things have been pretty stable at Northwest Natural Holding, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Northwest Natural Holding doesn't end up being a multi-bagger in a few years time. That probably explains why Northwest Natural Holding has been paying out 71% of its earnings as dividends to shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.

In Conclusion...

In summary, Northwest Natural Holding isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors may be recognizing these trends since the stock has only returned a total of 4.8% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Northwest Natural Holding does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.