What Do The Returns On Capital At New Jersey Resources (NYSE:NJR) Tell Us?

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. Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 investigating New Jersey Resources (NYSE:NJR), we don’t think it’s current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.043 = US$216m ÷ (US$5.6b – US$534m) (Based on the trailing twelve months to September 2020).

So, New Jersey Resources has an ROCE of 4.3{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb}. In absolute terms, that’s a low return and it also under-performs the Gas Utilities industry average of 5.6{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb}.

View our latest analysis for New Jersey Resources

Above you can see how the current ROCE for New Jersey Resources compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is New Jersey Resources’ ROCE Trending?

The trend of ROCE doesn’t look fantastic because it’s fallen from 8.6{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} five years ago, while the business’s capital employed increased by 77{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb}. That being said, New Jersey Resources raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven’t been put to work yet so it’s worth watching what happens in the future with New Jersey Resources’ earnings and if they change as a result from the capital raise.

In Conclusion…

From the above analysis, we find it rather worrisome that returns on capital and sales for New Jersey Resources have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 23{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} in the last five years. Either way, we aren’t huge fans of the current trends and so with that we think you might find better investments elsewhere.

One final note, you should learn about the 2 warning signs we’ve spotted with New Jersey Resources (including 1 which is concerning) .

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.

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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.
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