Here's What To Make Of MGE Energy's (NASDAQ:MGEE) Decelerating Rates Of Return
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at MGE Energy (NASDAQ:MGEE) and its ROCE trend, we weren't exactly thrilled.
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. To calculate this metric for MGE Energy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = US$161m ÷ (US$2.6b - US$159m) (Based on the trailing twelve months to June 2023).
Thus, MGE Energy has an ROCE of 6.7%. On its own that's a low return, but compared to the average of 4.5% generated by the Electric Utilities industry, it's much better.
Check out our latest analysis for MGE Energy
In the above chart we have measured MGE Energy'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 MGE Energy here for free.
So How Is MGE Energy's ROCE Trending?
The returns on capital haven't changed much for MGE Energy in recent years. The company has consistently earned 6.7% for the last five years, and the capital employed within the business has risen 35% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
Our Take On MGE Energy's ROCE
As we've seen above, MGE Energy's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 24% 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.
On a separate note, we've found 2 warning signs for MGE Energy you'll probably want to know about.
While MGE Energy isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
