Returns On Capital At Meridian Energy (NZSE:MEL) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Meridian Energy (NZSE:MEL) and its ROCE trend, we weren't exactly thrilled.

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Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Meridian Energy, this is the formula:

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

0.022 = NZ$272m ÷ (NZ$13b - NZ$872m) (Based on the trailing twelve months to December 2024).

Therefore, Meridian Energy has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 11%.

See our latest analysis for Meridian Energy

Above you can see how the current ROCE for Meridian Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Meridian Energy .

The Trend Of ROCE

On the surface, the trend of ROCE at Meridian Energy doesn't inspire confidence. To be more specific, ROCE has fallen from 7.2% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Meridian Energy is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 36% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing to note, we've identified 1 warning sign with Meridian Energy and understanding it should be part of your investment process.

While Meridian 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.