Investors Will Want Genie Energy's (NYSE:GNE) Growth In ROCE To Persist

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Genie Energy (NYSE:GNE) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Genie Energy, this is the formula:

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

0.058 = US$5.1m ÷ (US$191m - US$104m) (Based on the trailing twelve months to March 2021).

Thus, Genie Energy has an ROCE of 5.8%. In absolute terms, that's a low return, but it's much better than the Electric Utilities industry average of 4.5%.

View our latest analysis for Genie Energy

Historical performance is a great place to start when researching a stock so above you can see the gauge for Genie Energy's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Genie Energy, check out these free graphs here.

How Are Returns Trending?

Genie Energy has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 805%. The company is now earning US$0.06 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 30% less capital than it was five years ago. Genie Energy may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 55% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

Our Take On Genie Energy's ROCE

From what we've seen above, Genie Energy has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has only returned 1.1% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing, we've spotted 2 warning signs facing Genie Energy that you might find interesting.

While Genie 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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