NiSource (NYSE:NI) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at NiSource (NYSE:NI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

We've discovered 3 warning signs about NiSource. View them for free.

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. The formula for this calculation on NiSource is:

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

0.056 = US$1.6b ÷ (US$33b - US$4.2b) (Based on the trailing twelve months to March 2025).

Therefore, NiSource has an ROCE of 5.6%. On its own, that's a low figure but it's around the 5.1% average generated by the Integrated Utilities industry.

View our latest analysis for NiSource

Above you can see how the current ROCE for NiSource compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering NiSource for free.

The Trend Of ROCE

On the surface, the trend of ROCE at NiSource doesn't inspire confidence. To be more specific, ROCE has fallen from 7.3% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From NiSource's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that NiSource is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 92% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing: We've identified 3 warning signs with NiSource (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

While NiSource 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.