Return Trends At Genesis Energy (NZSE:GNE) Aren't Appealing

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Genesis Energy (NZSE:GNE), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Genesis Energy:

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

0.05 = NZ$204m ÷ (NZ$4.8b - NZ$752m) (Based on the trailing twelve months to December 2021).

Therefore, Genesis Energy has an ROCE of 5.0%. On its own, that's a low figure but it's around the 6.3% average generated by the Electric Utilities industry.

See our latest analysis for Genesis Energy

In the above chart we have measured Genesis Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Genesis Energy.

What The Trend Of ROCE Can Tell Us

Things have been pretty stable at Genesis Energy, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Genesis Energy doesn't end up being a multi-bagger in a few years time. That being the case, it makes sense that Genesis Energy has been paying out 127% of its earnings to its shareholders. Most shareholders probably know this and own the stock for its dividend.

The Bottom Line On Genesis Energy's ROCE

In summary, Genesis Energy isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 89% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One final note, you should learn about the 3 warning signs we've spotted with Genesis Energy (including 2 which don't sit too well with us) .

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.