Consolidated Edison (NYSE:ED) Might Be Having Difficulty Using Its Capital Effectively

By
Simply Wall St
Published
August 14, 2021
NYSE:ED
Source: Shutterstock

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Consolidated Edison (NYSE:ED) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Consolidated Edison, this is the formula:

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

0.044 = US$2.5b ÷ (US$63b - US$5.6b) (Based on the trailing twelve months to June 2021).

So, Consolidated Edison has an ROCE of 4.4%. On its own, that's a low figure but it's around the 4.6% average generated by the Integrated Utilities industry.

See our latest analysis for Consolidated Edison

roce
NYSE:ED Return on Capital Employed August 14th 2021

Above you can see how the current ROCE for Consolidated Edison 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 report on analyst forecasts for the company.

What Can We Tell From Consolidated Edison's ROCE Trend?

In terms of Consolidated Edison's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 5.5%, but since then they've fallen to 4.4%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that Consolidated Edison is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 21% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Consolidated Edison does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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.
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