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Should We Be Excited About The Trends Of Returns At Edison International (NYSE:EIX)?

Simply Wall St
·3 mins read

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Edison International (NYSE:EIX), we don't think it's current trends fit the mold of a multi-bagger.

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 Edison International is:

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

0.04 = US$2.5b ÷ (US$67b - US$5.9b) (Based on the trailing twelve months to June 2020).

Therefore, Edison International has an ROCE of 4.0%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 4.6%.

Check out our latest analysis for Edison International

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Above you can see how the current ROCE for Edison International compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Edison International's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 6.0% five years ago, while capital employed has grown 32%. Usually this isn't ideal, but given Edison International conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Edison International 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. Additionally, we found that Edison International's most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.

The Key Takeaway

To conclude, we've found that Edison International is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 4.0% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Edison International does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

While Edison International 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.