Is Genesis Energy (NZSE: GNE) likely to make a difference?

If we are to find a potential multi-bagger, there are often underlying trends that can provide clues. In a perfect world, we would like to see a business invest more capital in their business, and ideally the returns from that capital increase as well. Simply put, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. In light of this, when we looked Genesis Energy (NZSE: GNE) and its ROCE trend, we weren’t exactly thrilled.

What is Return on Capital Employed (ROCE)?

If you’ve never worked with ROCE before, it measures the “ return ” (profit before tax) that a business generates from the capital employed in its business. The formula for this calculation on Genesis Energy is:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.034 = NZ $ 146M ÷ (NZ $ 4.6B – NZ $ 301M) (Based on the last twelve months up to June 2020).

So, Genesis Energy has a ROCE of 3.4%. In the end, that’s a low performance and underperforming the electric utility industry average of 4.7%.

See our latest review for Genesis Energy

In the graph above, we measured Genesis Energy’s past ROCE against its past performance, but the future is arguably more important. If you want, you can check out analyst forecasts covering Genesis Energy here for free.

What can we say about Genesis Energy’s ROCE trend?

On the surface, the ROCE trend at Genesis Energy does not inspire confidence. To be more precise, ROCE has increased from 5.9% over the past five years. On the other hand, the company has employed more capital with no corresponding improvement in sales over the past year, which might suggest that these investments are longer-term games. It may take some time for the business to begin to see a change in the benefits of these investments.

The key to take away

In summary, Genesis Energy is reinvesting funds into the business for growth, but sadly, it looks like sales haven’t grown much yet. Yet for long-term shareholders, the stock has offered them an incredible 180% return over the past five years, so the market looks bullish on its future. However, unless these underlying trends turn more positive, our hopes would not be too high.

On a separate note we have found 2 warning signs for Genesis Energy you will probably want to know.

While Genesis Energy does not currently achieve the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.

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