Yahoo Finance Investors Met With Slowing Returns on Capital At Emera (TSE:EMA)
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Emera (TSE:EMA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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 Emera:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = CA$1.8b ÷ (CA$39b - CA$4.5b) (Based on the trailing twelve months to December 2023).
Therefore, Emera has an ROCE of 5.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.8%.
See our latest analysis for Emera
Above you can see how the current ROCE for Emera compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Emera for free.
What Can We Tell From Emera's ROCE Trend?
The returns on capital haven't changed much for Emera in recent years. Over the past five years, ROCE has remained relatively flat at around 5.2% and the business has deployed 26% more capital into its operations. 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.
What We Can Learn From Emera's ROCE
As we've seen above, Emera's returns on capital haven't increased but it is reinvesting in the business. And with the stock having returned a mere 19% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
On a final note, we found 3 warning signs for Emera (1 makes us a bit uncomfortable) you should be aware of.
While Emera isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.
