UK markets closed
  • FTSE 100

    7,204.55
    +14.25 (+0.20%)
     
  • FTSE 250

    22,931.66
    +14.61 (+0.06%)
     
  • AIM

    1,234.19
    -7.18 (-0.58%)
     
  • GBP/EUR

    1.1800
    -0.0061 (-0.51%)
     
  • GBP/USD

    1.3760
    -0.0036 (-0.26%)
     
  • BTC-GBP

    44,513.19
    -408.81 (-0.91%)
     
  • CMC Crypto 200

    1,453.34
    -49.69 (-3.31%)
     
  • S&P 500

    4,544.90
    -4.88 (-0.11%)
     
  • DOW

    35,677.02
    +73.94 (+0.21%)
     
  • CRUDE OIL

    83.98
    +1.48 (+1.79%)
     
  • GOLD FUTURES

    1,793.10
    +11.20 (+0.63%)
     
  • NIKKEI 225

    28,804.85
    +96.27 (+0.34%)
     
  • HANG SENG

    26,126.93
    +109.40 (+0.42%)
     
  • DAX

    15,542.98
    +70.42 (+0.46%)
     
  • CAC 40

    6,733.69
    +47.52 (+0.71%)
     

Slowing Rates Of Return At SSE (LON:SSE) Leave Little Room For Excitement

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
·3-min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at SSE (LON:SSE) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on SSE is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.098 = UK£1.8b ÷ (UK£22b - UK£3.5b) (Based on the trailing twelve months to March 2021).

Therefore, SSE has an ROCE of 9.8%. On its own that's a low return, but compared to the average of 7.2% generated by the Electric Utilities industry, it's much better.

See our latest analysis for SSE

roce
roce

In the above chart we have measured SSE's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for SSE.

So How Is SSE's ROCE Trending?

There are better returns on capital out there than what we're seeing at SSE. The company has consistently earned 9.8% for the last five years, and the capital employed within the business has risen 22% 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.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 16% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From SSE's ROCE

As we've seen above, SSE's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 49% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to know some of the risks facing SSE we've found 4 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting