The Returns On Capital At Jersey Electricity (LON:JEL) Don't Inspire Confidence
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Jersey Electricity (LON:JEL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. Analysts use this formula to calculate it for Jersey Electricity:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.036 = UK£12m ÷ (UK£356m - UK£23m) (Based on the trailing twelve months to September 2023).
So, Jersey Electricity has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 6.9%.
See our latest analysis for Jersey Electricity
In the above chart we have measured Jersey Electricity'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 Jersey Electricity for free.
So How Is Jersey Electricity's ROCE Trending?
When we looked at the ROCE trend at Jersey Electricity, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.6% from 6.2% five years ago. However it looks like Jersey Electricity might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
What We Can Learn From Jersey Electricity's ROCE
In summary, Jersey Electricity is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 11% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
Jersey Electricity does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...
While Jersey Electricity 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.
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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.
