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Constellation Energy (NASDAQ:CEG) Will Be Hoping To Turn Its Returns On Capital Around

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Constellation Energy (NASDAQ:CEG), we weren't too upbeat about how things were going.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Constellation Energy is:

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

0.00098 = US$38m ÷ (US$47b - US$7.9b) (Based on the trailing twelve months to September 2022).

So, Constellation Energy has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 4.6%.

View our latest analysis for Constellation Energy

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Above you can see how the current ROCE for Constellation Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Constellation Energy here for free.

What Does the ROCE Trend For Constellation Energy Tell Us?

In terms of Constellation Energy's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 3.7% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Constellation Energy becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Constellation Energy is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last yearthe stock has delivered a respectable 85% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you're still interested in Constellation Energy it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Constellation Energy isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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

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.

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