There Are Reasons To Feel Uneasy About Emera's (TSE:EMA) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

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. Analysts use this formula to calculate it for Emera:

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

0.04 = CA$1.4b ÷ (CA$40b - CA$4.1b) (Based on the trailing twelve months to June 2024).

Thus, Emera has an ROCE of 4.0%. On its own, that's a low figure but it's around the 4.9% average generated by the Electric Utilities industry.

See 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 for free.

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Emera's ROCE has reduced by 25% over the last five years, while the business employed 33% more capital. That being said, Emera raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Emera probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

What We Can Learn From Emera's ROCE

To conclude, we've found that Emera is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 26% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know more about Emera, we've spotted 5 warning signs, and 2 of them shouldn't be ignored.

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.