Returns Are Gaining Momentum At New Jersey Resources (NYSE:NJR)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at New Jersey Resources (NYSE:NJR) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for New Jersey Resources:

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

0.064 = US$376m ÷ (US$6.8b - US$894m) (Based on the trailing twelve months to June 2024).

Thus, New Jersey Resources has an ROCE of 6.4%. Even though it's in line with the industry average of 6.4%, it's still a low return by itself.

Check out our latest analysis for New Jersey Resources

In the above chart we have measured New Jersey Resources' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering New Jersey Resources for free.

What The Trend Of ROCE Can Tell Us

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.4%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 66%. So we're very much inspired by what we're seeing at New Jersey Resources thanks to its ability to profitably reinvest capital.

What We Can Learn From New Jersey Resources' ROCE

To sum it up, New Jersey Resources has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 26% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

New Jersey Resources does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

While New Jersey Resources 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.