This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Jersey Electricity plc (LON:JEL).
Jersey Electricity stock represents an ownership share in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. To understand Jersey Electricity’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.See our latest analysis for Jersey Electricity
Calculating Return On Capital Employed for JEL
When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. We’ll look at Jersey Electricity’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. JEL’s ROCE is calculated below:
ROCE Calculation for JEL
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = UK£14.19m ÷ (UK£276.04m – UK£16.97m) = 5.48%
JEL’s 5.48% ROCE means that for every £100 you invest, the company creates £5.5. This makes Jersey Electricity unattractive when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital will be able to compound over time, but not to the extent investors should be aiming for.
Why is this the case?
Although Jersey Electricity is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. If you go back three years, you’ll find that JEL’s ROCE has decreased from 6.13%. With this, the current earnings of UK£14.19m improved from UK£13.04m however capital employed has grown by a proportionally greater amount because of a hike in the level of total assets and a smaller reliance on current liabilities (less borrowing to fund operations) , which suggests investor’s ROCE has fallen because the company requires more capital to create earnings despite the previous growth in EBT.
ROCE for JEL investors has fallen in the last few years and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. However, it is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for JEL’s future growth? Take a look at our free research report of analyst consensus for JEL’s outlook.
- Valuation: What is JEL worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether JEL is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.