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If you want to avoid a declining business, what trends can give you early warning? Usually, you’ll see both trends. return As capital employed (ROCE) decreases, this typically coincides with a decrease in equity. amount of capital employed. This ultimately means that companies earn less per dollar invested and, moreover, their employed capital base shrinks. Having said that, if you take a quick look, meridian energy (NZSE:MEL) I’m not optimistic, but let’s investigate further.
What is return on capital employed (ROCE)?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (return) on the capital employed in the business. To calculate this metric for Meridian Energy, use the following formula:
Return on Capital Employed = Earnings before interest and tax (EBIT) ÷ (Total assets – Current liabilities)
0.017 = NZ$154 million ÷ (NZ$10 billion – NZ$720 million) (Based on the previous 12 months to June 2023).
therefore, Meridian Energy’s ROCE is 1.7%. After all, this is a poor return, below the renewable energy industry average of 6.7%.
Check out our latest analysis for Meridian Energy.
Above, you can see how Meridian Energy’s current ROCE compares to its previous return on capital, but history can only tell us so much. If you’re interested, take a look at our analyst forecasts. free A report on analyst forecasts for a company.
So, how is Meridian Energy’s ROCE trending?
There are reasons to be cautious about Meridian Energy, given its declining earnings trend. Specifically, ROCE was 4.8% five years ago, but it has declined significantly since then. And in terms of capital employed, businesses are leveraging about the same amount of capital as they were back then. Companies exhibiting these characteristics tend not to be shrinking, but are more mature and may face competitive margin pressures. Therefore, I wouldn’t hold my breath for Meridian Energy to become a multibagger if things continue as they are, as these trends are not usually conducive to the creation of a multibagger.
conclusion
All in all, a lower return using the same amount of capital is not exactly a sign of compound interest. However, despite these fundamental concerns, investors appear to be very optimistic, as the stock has performed solidly with a 91% return over the past five years. In any case, we’re not very happy with the fundamentals, so we’re staying away from this stock for now.
One more thing: we have identified two warning signs They are related to Meridian Energy (at least one, which can be serious) and understanding them is certainly helpful.
If you want to find solid companies with high earnings, check this out. free List of companies with good balance sheets and good return 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 using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
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