Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. However, after investigating Exelon (NASDAQ:EXC), we don’t think it’s current trends fit the mold of a multi-bagger.
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 Exelon:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.034 = US$3.9b ÷ (US$128b – US$11b) (Based on the trailing twelve months to September 2020).
Therefore, Exelon has an ROCE of 3.4%. In absolute terms, that’s a low return and it also under-performs the Electric Utilities industry average of 4.6%.
See our latest analysis for Exelon
In the above chart we have measured Exelon’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
When we looked at the ROCE trend at Exelon, we didn’t gain much confidence. Over the last five years, returns on capital have decreased to 3.4% from 5.1% five years ago. However it looks like Exelon might be reinvesting for long term growth because while capital employed has increased, the company’s sales haven’t changed much in the last 12 months. It’s worth keeping an eye on the company’s earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line On Exelon’s ROCE
Bringing it all together, while we’re somewhat encouraged by Exelon’s reinvestment in its own business, we’re aware that returns are shrinking. Since the stock has gained an impressive 83% 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.
Exelon does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious…
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email [email protected].
