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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at NextEra Energy (NYSE:NEE), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
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 NextEra Energy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.045 = US$7.4b ÷ (US$190b - US$25b) (Based on the trailing twelve months to December 2024).
Therefore, NextEra Energy has an ROCE of 4.5%. On its own, that's a low figure but it's around the 4.9% average generated by the Electric Utilities industry.
See our latest analysis for NextEra Energy
In the above chart we have measured NextEra Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for NextEra Energy .
What The Trend Of ROCE Can Tell Us
The returns on capital haven't changed much for NextEra Energy in recent years. The company has consistently earned 4.5% for the last five years, and the capital employed within the business has risen 59% 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.
In Conclusion...
Long story short, while NextEra Energy has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 21% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for NextEra Energy (of which 1 is a bit concerning!) that you should know about.