Here's What To Make Of New Jersey Resources' (NYSE:NJR) Decelerating Rates Of Return
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at New Jersey Resources (NYSE:NJR) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for New Jersey Resources, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = US$329m ÷ (US$6.2b - US$969m) (Based on the trailing twelve months to June 2022).
Thus, New Jersey Resources has an ROCE of 6.3%. In absolute terms, that's a low return but it's around the Gas Utilities industry average of 5.4%.
Check out our latest analysis for New Jersey Resources
In the above chart we have measured New Jersey Resources' 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 New Jersey Resources here for free.
What Can We Tell From New Jersey Resources' ROCE Trend?
The returns on capital haven't changed much for New Jersey Resources in recent years. Over the past five years, ROCE has remained relatively flat at around 6.3% and the business has deployed 67% more capital into its operations. 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.
In Conclusion...
In summary, New Jersey Resources has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 20% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you'd like to know more about New Jersey Resources, we've spotted 2 warning signs, and 1 of them is significant.
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.
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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.
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