Return Trends At Jersey Electricity (LON:JEL) Aren't Appealing

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Jersey Electricity (LON:JEL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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 Jersey Electricity is:

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

0.054 = UK£16m ÷ (UK£310m - UK£21m) (Based on the trailing twelve months to September 2020).

So, Jersey Electricity has an ROCE of 5.4%. On its own, that's a low figure but it's around the 6.6% average generated by the Electric Utilities industry.

See our latest analysis for Jersey Electricity

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.

What Can We Tell From Jersey Electricity's ROCE Trend?

The returns on capital haven't changed much for Jersey Electricity in recent years. The company has consistently earned 5.4% for the last five years, and the capital employed within the business has risen 30% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

Long story short, while Jersey Electricity has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly, the stock has only gained 36% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you're still interested in Jersey Electricity it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Jersey Electricity 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.

When trading Jersey Electricity or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.