Yahoo Finance Returns On Capital At NextEra Energy (NYSE:NEE) Paint A Concerning Picture
If you're looking for a multi-bagger, there's a few things to keep an eye out 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. In light of that, when we looked at NextEra Energy (NYSE:NEE) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on NextEra Energy is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.027 = US$3.5b ÷ (US$156b - US$28b) (Based on the trailing twelve months to September 2022).
Thus, NextEra Energy has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 4.6%.
Check out our latest analysis for NextEra Energy
Above you can see how the current ROCE for NextEra Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for NextEra Energy.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at NextEra Energy, we didn't gain much confidence. Around five years ago the returns on capital were 5.6%, but since then they've fallen to 2.7%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From NextEra Energy's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for NextEra Energy. And long term investors must be optimistic going forward because the stock has returned a huge 143% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
If you'd like to know more about NextEra Energy, we've spotted 2 warning signs, and 1 of them is a bit concerning.
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. 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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