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Is Eversource Energy's (NYSE:ES) Capital Allocation Ability Worth Your Time?

Simply Wall St

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Today we'll evaluate Eversource Energy (NYSE:ES) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

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

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

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

Or for Eversource Energy:

0.052 = US$1.8b ÷ (US$39b - US$4.6b) (Based on the trailing twelve months to March 2019.)

So, Eversource Energy has an ROCE of 5.2%.

View our latest analysis for Eversource Energy

Is Eversource Energy's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. It appears that Eversource Energy's ROCE is fairly close to the Electric Utilities industry average of 4.7%. Regardless of how Eversource Energy stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.

The image below shows how Eversource Energy's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:ES Past Revenue and Net Income, July 3rd 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Eversource Energy.

Eversource Energy's Current Liabilities And Their Impact On Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Eversource Energy has total liabilities of US$4.6b and total assets of US$39b. As a result, its current liabilities are equal to approximately 12% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

What We Can Learn From Eversource Energy's ROCE

That's not a bad thing, however Eversource Energy has a weak ROCE and may not be an attractive investment. Of course, you might also be able to find a better stock than Eversource Energy. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like Eversource Energy better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.