Returns At SSE (LON:SSE) Are On The Way Up

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at SSE (LON:SSE) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for SSE:

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

0.12 = UK£2.9b ÷ (UK£28b - UK£4.9b) (Based on the trailing twelve months to March 2024).

So, SSE has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.6% generated by the Electric Utilities industry.

View our latest analysis for SSE

In the above chart we have measured SSE'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 SSE for free.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from SSE. Over the last five years, returns on capital employed have risen substantially to 12%. The amount of capital employed has increased too, by 36%. So we're very much inspired by what we're seeing at SSE thanks to its ability to profitably reinvest capital.

What We Can Learn From SSE's ROCE

In summary, it's great to see that SSE can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 79% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if SSE can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 2 warning signs with SSE and understanding these should be part of your investment process.

While SSE 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.

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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.