Here's What To Make Of NextEra Energy's (NYSE:NEE) Decelerating Rates Of Return

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at NextEra Energy (NYSE:NEE), it didn't seem to tick all of these boxes.

Understanding 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. Analysts use this formula to calculate it for NextEra Energy:

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

0.065 = US$9.3b ÷ (US$168b - US$25b) (Based on the trailing twelve months to June 2023).

Therefore, NextEra Energy has an ROCE of 6.5%. On its own that's a low return, but compared to the average of 4.5% generated by the Electric Utilities industry, it's much better.

See our latest analysis for NextEra Energy

Above you can see how the current ROCE for NextEra Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for NextEra Energy.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at NextEra Energy. The company has employed 68% more capital in the last five years, and the returns on that capital have remained stable at 6.5%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From NextEra Energy's ROCE

In conclusion, NextEra Energy has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 81% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to know some of the risks facing NextEra Energy we've found 3 warning signs (1 can't be ignored!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.