Yahoo Finance Here's What's Concerning About Emera's (TSE:EMA) Returns On Capital
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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Emera (TSE:EMA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Emera, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.045 = CA$1.4b ÷ (CA$40b - CA$7.7b) (Based on the trailing twelve months to September 2022).
Therefore, Emera has an ROCE of 4.5%. On its own, that's a low figure but it's around the 4.6% average generated by the Electric Utilities industry.
Check out our latest analysis for Emera
In the above chart we have measured Emera's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Emera here for free.
The Trend Of ROCE
When we looked at the ROCE trend at Emera, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.5% from 5.7% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
In Conclusion...
In summary, despite lower returns in the short term, we're encouraged to see that Emera is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 39% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
One final note, you should learn about the 3 warning signs we've spotted with Emera (including 1 which is concerning) .
While Emera may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
