What Should You Know About Jersey Electricity plc’s (LON:JEL) Return On Capital?

I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Jersey Electricity plc (LON:JEL).

Purchasing Jersey Electricity gives you an ownership stake in the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. Your return is tied to JEL’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. 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.

View our latest analysis for Jersey Electricity

What is Return on Capital Employed (ROCE)?

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Jersey Electricity is good at growing investor capital. I have calculated Jersey Electricity’s ROCE for you below:

ROCE Calculation for JEL

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = UK£14m ÷ (UK£276m – UK£17m) = 5.5%

The calculation above shows that JEL’s earnings were 5.5% of capital employed. Comparing this to a healthy 15% benchmark shows Jersey Electricity is currently unable to return a satisfactory amount to owners for the use of their capital, which isn’t good for investors who have forgone other potentially solid companies.

LSE:JEL Last Perf October 31st 18
LSE:JEL Last Perf October 31st 18

Then why have investors invested?

The underperforming ROCE is not ideal for Jersey Electricity investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, JEL’s ROCE may increase, in which case your portfolio could benefit from holding the company. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking at the past 3 year period shows us that JEL weakened investor return on capital employed from 6.1%. We can see that earnings have actually increased from UK£13m to UK£14m but capital employed has grown by a proportionally greater amount in response to an increase in total assets and decrease in current liabilities (less borrowed money) , which suggests investor’s ROCE has fallen because the company requires more capital to create earnings despite the previous growth in EBT.

Next Steps

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 building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate JEL or move on to other alternatives.

  1. 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.
  2. 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.
  3. 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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.