Returns On Capital At Genesis Energy (NZSE:GNE) Have Stalled

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. In light of that, when we looked at Genesis Energy (NZSE:GNE) and its ROCE trend, we weren't exactly thrilled.

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 Genesis Energy is:

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).

Thus, Genesis Energy has an ROCE of 5.0%. Even though it's in line with the industry average of 5.0%, it's still a low return by itself.

See our latest analysis for Genesis Energy

Above you can see how the current ROCE for Genesis Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Genesis Energy here for free.

What Can We Tell From Genesis Energy's ROCE Trend?

There hasn't been much to report for Genesis Energy's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Genesis Energy to be a multi-bagger going forward. That probably explains why Genesis Energy has been paying out 152% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

The Key Takeaway

We can conclude that in regards to Genesis Energy's returns on capital employed and the trends, there isn't much change to report on. Although the market must be expecting these trends to improve because the stock has gained 54% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One final note, you should learn about the 3 warning signs we've spotted with Genesis Energy (including 2 which make us uncomfortable) .

While Genesis Energy 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.