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There are a few key trends to look for if we want to identify the next multi-bagger. 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. In light of that, when we looked at Eversource Energy (NYSE:ES) and its ROCE trend, we weren't exactly thrilled.
What is 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 Eversource Energy is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = US$2.1b ÷ (US$47b - US$5.1b) (Based on the trailing twelve months to June 2021).
Therefore, Eversource Energy has an ROCE of 5.0%. Even though it's in line with the industry average of 4.6%, it's still a low return by itself.
Above you can see how the current ROCE for Eversource Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Eversource Energy here for free.
What The Trend Of ROCE Can Tell Us
There are better returns on capital out there than what we're seeing at Eversource Energy. The company has consistently earned 5.0% for the last five years, and the capital employed within the business has risen 47% in that time. 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.
Our Take On Eversource Energy's ROCE
Long story short, while Eversource Energy has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 92% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
If you'd like to know more about Eversource Energy, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.
While Eversource 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.
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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