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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Although, when we looked at Eversource Energy (NYSE:ES), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Eversource Energy is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.053 = US$2.8b ÷ (US$60b - US$6.7b) (Based on the trailing twelve months to December 2024).
So, Eversource Energy has an ROCE of 5.3%. Even though it's in line with the industry average of 4.9%, it's still a low return by itself.
Check out our latest analysis for Eversource Energy
In the above chart we have measured Eversource Energy's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Eversource Energy .
So How Is Eversource Energy's ROCE Trending?
The returns on capital haven't changed much for Eversource Energy in recent years. The company has consistently earned 5.3% for the last five years, and the capital employed within the business has risen 41% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line On Eversource Energy's ROCE
Long story short, while Eversource Energy has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 13% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, 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 4 warning signs for Eversource Energy (of which 2 are a bit concerning!) that you should know about.