If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, NRG Energy (NYSE:NRG) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on NRG Energy is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$1.4b ÷ (US$12b - US$2.0b) (Based on the trailing twelve months to September 2020).
So, NRG Energy has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 4.6% generated by the Electric Utilities industry.
Above you can see how the current ROCE for NRG Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for NRG Energy.
The Trend Of ROCE
You'd find it hard not to be impressed with the ROCE trend at NRG Energy. The data shows that returns on capital have increased by 230% over the trailing five years. The company is now earning US$0.1 per dollar of capital employed. In regards to capital employed, NRG Energy appears to been achieving more with less, since the business is using 71% less capital to run its operation. NRG Energy may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Bottom Line On NRG Energy's ROCE
In summary, it's great to see that NRG Energy has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has returned a staggering 268% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if NRG Energy can keep these trends up, it could have a bright future ahead.
One more thing: We've identified 4 warning signs with NRG Energy (at least 2 which are a bit unpleasant) , and understanding them would certainly be useful.
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.
This article by Simply Wall St is general in nature. 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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