Do Eversource Energy’s (NYSE:ES) Returns On Capital Employed Make The Cut?

Today we are going to look at Eversource Energy (NYSE:ES) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for Eversource Energy:

0.05 = US$1.8b ÷ (US$39b - US$3.5b) (Based on the trailing twelve months to June 2019.)

So, Eversource Energy has an ROCE of 5.0%.

View our latest analysis for Eversource Energy

Is Eversource Energy's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. It appears that Eversource Energy's ROCE is fairly close to the Electric Utilities industry average of 4.9%. Regardless of how Eversource Energy stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.

You can see in the image below how Eversource Energy's ROCE compares to its industry. Click to see more on past growth.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Eversource Energy.

Do Eversource Energy's Current Liabilities Skew Its ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Eversource Energy has total liabilities of US$3.5b and total assets of US$39b. As a result, its current liabilities are equal to approximately 9.0% of its total assets. Eversource Energy has a low level of current liabilities, which have a negligible impact on its already low ROCE.

The Bottom Line On Eversource Energy's ROCE

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We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.