Yahoo Finance What Can We Learn From Eversource Energy’s (NYSE:ES) Investment Returns?
Today we'll evaluate Eversource Energy (NYSE:ES) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Eversource Energy:
0.051 = US$1.8b ÷ (US$40b - US$3.7b) (Based on the trailing twelve months to September 2019.)
So, Eversource Energy has an ROCE of 5.1%.
View our latest analysis for Eversource Energy
Is Eversource Energy's ROCE Good?
One way to assess ROCE is to compare similar companies. It appears that Eversource Energy's ROCE is fairly close to the Electric Utilities industry average of 4.6%. Separate from how Eversource Energy stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
You can click on the image below to see (in greater detail) how Eversource Energy's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Eversource Energy.
What Are Current Liabilities, And How Do They Affect Eversource Energy's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Eversource Energy has current liabilities of US$3.7b and total assets of US$40b. Therefore its current liabilities are equivalent to approximately 9.4% of its total assets. Eversource Energy reports few current liabilities, which have a negligible impact on its unremarkable ROCE.
Our Take On Eversource Energy's ROCE
If performance improves, then Eversource Energy may be an OK investment, especially at the right valuation. You might be able to find a better investment than Eversource Energy. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
I will like Eversource Energy better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
