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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after briefly looking over the numbers, we don't think Sempra (NYSE:SRE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding 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. To calculate this metric for Sempra, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.033 = US$2.9b ÷ (US$96b - US$9.7b) (Based on the trailing twelve months to December 2024).
So, Sempra has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Integrated Utilities industry average of 5.0%.
View our latest analysis for Sempra
Above you can see how the current ROCE for Sempra 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 analyst report for Sempra .
So How Is Sempra's ROCE Trending?
The trend of ROCE doesn't look fantastic because it's fallen from 4.4% five years ago, while the business's capital employed increased by 53%. Usually this isn't ideal, but given Sempra conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Sempra's earnings and if they change as a result from the capital raise.
The Bottom Line On Sempra's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Sempra have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 44% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.