To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating NextEra Energy (NYSE:NEE), we don't think it's current trends fit the mold of a multi-bagger.

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 NextEra Energy is:

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

0.05 = US$7.9b ÷ (US$185b - US$26b) (Based on the trailing twelve months to June 2024).

Thus, NextEra Energy has an ROCE of 5.0%. Even though it's in line with the industry average of 4.7%, it's still a low return by itself.

In the above chart we have measured NextEra Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering NextEra Energy for free.

What Can We Tell From NextEra Energy's ROCE Trend?

The returns on capital haven't changed much for NextEra Energy in recent years. The company has employed 65% more capital in the last five years, and the returns on that capital have remained stable at 5.0%. 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.

Our Take On NextEra Energy's ROCE

Long story short, while NextEra Energy has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 64% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

NextEra Energy does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

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.

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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.