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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Although, when we looked at New Jersey Resources (NYSE:NJR), it didn't seem to tick all of these boxes.
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. Analysts use this formula to calculate it for New Jersey Resources:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = US$216m ÷ (US$5.6b - US$534m) (Based on the trailing twelve months to September 2020).
Thus, New Jersey Resources has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Gas Utilities industry average of 5.6%.
Above you can see how the current ROCE for New Jersey Resources compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From New Jersey Resources' ROCE Trend?
We weren't thrilled with the trend because New Jersey Resources' ROCE has reduced by 50% over the last five years, while the business employed 77% more capital. Usually this isn't ideal, but given New Jersey Resources conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. New Jersey Resources probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
What We Can Learn From New Jersey Resources' ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for New Jersey Resources have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 19% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
One more thing to note, we've identified 1 warning sign with New Jersey Resources and understanding it should be part of your investment process.
While New Jersey Resources 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. 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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