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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating WEC Energy Group (NYSE:WEC), we don't think it's current trends fit the mold of a multi-bagger.
We've discovered 2 warning signs about WEC Energy Group. View them for free.
Return On Capital Employed (ROCE): What Is It?
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 WEC Energy Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = US$2.1b ÷ (US$47b - US$4.8b) (Based on the trailing twelve months to December 2024).
Thus, WEC Energy Group has an ROCE of 4.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.0%.
View our latest analysis for WEC Energy Group
In the above chart we have measured WEC Energy Group'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 analyst report for WEC Energy Group .
What Does the ROCE Trend For WEC Energy Group Tell Us?
In terms of WEC Energy Group's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 4.9% for the last five years, and the capital employed within the business has risen 34% 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.
In Conclusion...
In conclusion, WEC Energy Group has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 50% 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.
One more thing: We've identified 2 warning signs with WEC Energy Group (at least 1 which can't be ignored) , and understanding them would certainly be useful.