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Returns On Capital At Genesis Energy (NZSE:GNE) Have Stalled

·3-min read

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Genesis Energy (NZSE:GNE), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Genesis Energy is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.05 = NZ$204m ÷ (NZ$4.8b - NZ$752m) (Based on the trailing twelve months to December 2021).

Thus, Genesis Energy has an ROCE of 5.0%. Even though it's in line with the industry average of 5.0%, it's still a low return by itself.

See our latest analysis for Genesis Energy

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In the above chart we have measured Genesis Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Genesis Energy.

How Are Returns Trending?

Over the past five years, Genesis Energy's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Genesis Energy doesn't end up being a multi-bagger in a few years time. That probably explains why Genesis Energy has been paying out 149% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

Our Take On Genesis Energy's ROCE

In a nutshell, Genesis Energy has been trudging along with the same returns from the same amount of capital over the last five years. Although the market must be expecting these trends to improve because the stock has gained 70% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing Genesis Energy we've found 3 warning signs (2 can't be ignored!) that you should be aware of before investing here.

While Genesis Energy 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.

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