Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Consolidated Edison (NYSE:ED), it didn't seem to tick all of these boxes.
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. The formula for this calculation on Consolidated Edison is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = US$2.8b ÷ (US$64b - US$6.1b) (Based on the trailing twelve months to September 2023).
So, Consolidated Edison has an ROCE of 4.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.1%.
See our latest analysis for Consolidated Edison
Above you can see how the current ROCE for Consolidated Edison 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 Consolidated Edison here for free.
The Trend Of ROCE
There are better returns on capital out there than what we're seeing at Consolidated Edison. The company has consistently earned 4.8% for the last five years, and the capital employed within the business has risen 32% 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.
Our Take On Consolidated Edison's ROCE
As we've seen above, Consolidated Edison's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 43% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
Consolidated Edison does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are potentially serious...
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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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.