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In terms of Jersey Electricity’s historical ROCE trend, it doesn’t exactly demand attention
To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Jersey Electricity (LON:JEL) 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. The formula for this calculation on Jersey Electricity is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.056 = UK£16m ÷ (UK£312m – UK£20m) (Based on the trailing twelve months to March 2020).
So, Jersey Electricity has an ROCE of 5.6%. Ultimately, that’s a low return and it under-performs the Electric Utilities industry average of 7.0%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Jersey Electricity’s ROCE against it’s prior returns. If you want to delve into the historical earnings, revenue and cash flow of Jersey Electricity, check out these free graphs here.
So How Is Jersey Electricity’s ROCE Trending?
In terms of Jersey Electricity’s historical ROCE trend, it doesn’t exactly demand attention. The company has employed 37% more capital in the last five years, and the returns on that capital have remained stable at 5.6%. 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 Jersey Electricity’s ROCE
In conclusion, Jersey Electricity has been investing more capital into the business, but returns on that capital haven’t increased. And investors may be recognizing these trends since the stock has only returned a total of 29% 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.
While Jersey Electricity doesn’t shine too bright in this respect, it’s still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. 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.
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With an Engineers degree in Advanced Database Management and Information Security, Sandesh brings the deep understanding of the digital world to the table. His articles reflect the challenges and the complexities that come along with every disruption in the industry. He carries over six years of experience on working with websites and ensuring that the right article reaches the right reader.