If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after briefly looking over the numbers, we don't think New Jersey Resources (NYSE:NJR) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What is it?
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 New Jersey Resources:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.054 = US$271m ÷ (US$5.9b - US$882m) (Based on the trailing twelve months to March 2022).
So, New Jersey Resources has an ROCE of 5.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.3%.
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 here for free.
What The Trend Of ROCE Can Tell Us
In terms of New Jersey Resources' historical ROCE trend, it doesn't exactly demand attention. The company has employed 54% more capital in the last five years, and the returns on that capital have remained stable at 5.4%. 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.
The Key Takeaway
In summary, New Jersey Resources has simply been reinvesting capital and generating the same low rate of return as before. And with the stock having returned a mere 26% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you'd like to know more about New Jersey Resources, we've spotted 3 warning signs, and 2 of them are potentially serious.
While New Jersey Resources isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
What are the risks and opportunities for New Jersey Resources?
Trading at 4.2% below our estimate of its fair value
Earnings are forecast to grow 6.03% per year
Debt is not well covered by operating cash flow
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.