If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at WEC Energy Group (NYSE:WEC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is Return On Capital Employed (ROCE)?
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 WEC Energy Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.054 = US$1.7b ÷ (US$35b - US$2.8b) (Based on the trailing twelve months to September 2020).
So, WEC Energy Group 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 4.8%.
In the above chart we have measured WEC Energy Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
The returns on capital haven't changed much for WEC Energy Group in recent years. The company has consistently earned 5.4% for the last five years, and the capital employed within the business has risen 25% in that time. 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 WEC Energy Group's ROCE
In conclusion, WEC Energy Group has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 91% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
WEC Energy Group does have some risks though, and we've spotted 1 warning sign for WEC Energy Group that you might be interested in.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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