To find multi-bagger stock, what are the underlying trends we need to look for in a business? In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. Basically, this means that a business has profitable initiatives that it can keep reinvesting in, which is a hallmark of a dialing machine. Although, when we considered NextEra Energy (NYSE: NEE), it didn’t seem to tick all of those boxes.
What is Return on Employee Capital (ROCE)?
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. Analysts use this formula to calculate it for NextEra Energy:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.024 = US $ 2.8B ÷ (US $ 139B – US $ 20B) (Based on the last twelve months up to September 2021).
Therefore, NextEra Energy has a ROCE of 2.4%. At the end of the day, that’s poor performance and it’s below the electric utility industry average of 4.5%.
NYSE: NEE Return on Capital Employed December 3, 2021
In the graph above, we measured NextEra Energy’s past ROCE against its past performance, but arguably the future is more important. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
So, what is the evolution of NextEra Energy’s ROCE?
On the surface, the ROCE trend at NextEra Energy does not inspire confidence. Over the past five years, return on capital has declined to 2.4%, down from 5.7% five years ago. However, it looks like NextEra Energy is reinvesting for long-term growth, because while the capital employed has increased, the company’s sales haven’t changed much in the past 12 months. It may take some time for the business to begin to see a change in the benefits of these investments.
NextEra Energy’s ROCE result
In summary, NextEra Energy is reinvesting funds into the business for growth, but sadly it looks like sales haven’t grown much yet. Still, to long-term shareholders, the stock has offered them an incredible 241% return over the past five years, so the market seems bullish on its future. However, unless these underlying trends turn more positive, our hopes would not be too high.
NextEra Energy does carry some risks, however, we have found 4 warning signs in our investment analysis, and 1 of them is significant …
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
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