The Returns At Consolidated Edison (NYSE:ED) Aren't Growing
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Consolidated Edison (NYSE:ED) 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?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Consolidated Edison is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = US$3.2b ÷ (US$63b - US$4.9b) (Based on the trailing twelve months to March 2023).
So, Consolidated Edison has an ROCE of 5.5%. Even though it's in line with the industry average of 5.1%, it's still a low return by itself.
See our latest analysis for Consolidated Edison
In the above chart we have measured Consolidated Edison'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 Consolidated Edison here for free.
How Are Returns Trending?
In terms of Consolidated Edison's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 5.5% for the last five years, and the capital employed within the business has risen 34% 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 Consolidated Edison's ROCE
In conclusion, Consolidated Edison has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 43% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One more thing: We've identified 4 warning signs with Consolidated Edison (at least 2 which are potentially serious) , and understanding them would certainly be useful.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
