Electronic Arts (NASDAQ:EA) Will Be Hoping To Turn Its Returns On Capital Around - Yahoo Finance

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What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 Electronic Arts (NASDAQ:EA) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Electronic Arts:

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

0.10 = US$1.1b ÷ (US$13b - US$3.0b) (Based on the trailing twelve months to March 2021).

Therefore, Electronic Arts has an ROCE of 10%. In isolation, that's a pretty standard return but against the Entertainment industry average of 14%, it's not as good.

Check out our latest analysis for Electronic Arts

roce

Above you can see how the current ROCE for Electronic Arts compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Electronic Arts.

What The Trend Of ROCE Can Tell Us

In terms of Electronic Arts' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 10% from 19% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Electronic Arts has decreased its current liabilities to 22% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

To conclude, we've found that Electronic Arts is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 81% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Electronic Arts does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

This article by Simply Wall St is general in nature. 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.

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Biden's electric cars goals can be achieved, say experts | TheHill - The Hill

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President BidenJoe BidenThe Supreme Court and blind partisanship ended the illusion of independent agencies Missed debt ceiling deadline kicks off high-stakes fight Senate infrastructure talks spill over into rare Sunday session MORE’s reported electric vehicle goals can be achieved but will require robust action from both the government and the private sector, say experts interviewed by The Hill.

The administration is reportedly pushing to have 40 percent of car sales be electric by the end of the decade, a major leap from the roughly 2 percent of sales they make up today. 

Still, experts on the industry say the jump can be achieved, and some proponents say the administration should try to go further. 

“There has to be a process of change, but the transition can actually happen pretty quickly,” said Jessika Trancik, a professor who researches energy systems at the Massachusetts Institute of Technology.

“Many automakers are now ... making announcements about electrifying the vehicle models that they offer, so I think that that’s really important,” Trancik said. “The role of government policy of course is to make those sorts of decisions even more attractive and accelerate that whole process and also to put incentives in place so that electric vehicles can be available to people with different income levels.”

The transportation sector is the largest contributor to greenhouse gas emissions in the country, so reducing vehicle emissions is a major way the Biden administration can reach its goal of cutting greenhouse gas emissions in half by 2030 compared to 2005 levels. The administration also hopes to reach carbon neutrality by 2050. 

To have 40 percent of the U.S. auto fleet consist of electric vehicles, the nation will need cheaper models and more charging stations, said Trancik.

“The way government can have the most impact with these policies is to think carefully about incentives that leverage the innovation potential in the private sector,” she added. 

Josh Linn, a professor who researches the effects of environmental policies and market incentives at the University of Maryland, said one task ahead of automakers is to “figure out how to get consumers to like electric cars.”

“I think that’s sort of the biggest obstacle right now,” he said. “Consumers just don’t seem to be terribly excited about them.”

He also noted limited choices for less-expensive vehicles, and said there would need to be additional reductions in battery costs so that automakers can sell them profitably. 

Linn said that reaching the goal is not just about the government spending money, but spending that money wisely. 

He said one approach should be “providing some support for the charging stations but not full support” so that companies also have to invest in charging stations themselves. He said subsidies should be targeted to lower-income consumers. 

The reported 40 percent goal comes as the House and Senate debate infrastructure legislation, which is expected to include funding aimed at incentivizing the buildout of 500,000 electric vehicle charging stations. 

Democrats have also indicated that they’ll include clean vehicle tax credits in a budget reconciliation package that will only need Democratic votes to pass if there are no defectors.

Meanwhile, several automakers have independently indicated that they’ll shift toward electric vehicles. GM has pledged to have an all-electric light-duty fleet by 2035 and Ford has said that 40 percent of its vehicle sales worldwide will be electric by 2030. 

Margo Oge, who directed the Environmental Protection Agency’s Office of Transportation and Air Quality for 18 years, said the fact that so many automakers are already on board means that the Biden administration should try to push them even further. 

“Given where we are with all the investments that the car companies are making, I believe the president can do better than 40 percent,” Oge said. 

“If you ask a company today what it can do 10 years from now, they’re going to be conservative,” she said. “If companies are saying today ‘we will support 40 percent [zero emissions vehicles] by 2030’ I believe that the White House can get them to up that position to 50 and 60 percent.”

Oge has called for making 50 to 60 percent of U.S. vehicle sales electric by 2030. By 2035, she said the country should aim to end sales of new cars that are gas-powered.

“Cars last in the marketplace for 12 to 15 years, so if we’re going to be carbon neutral in 2050 ... by 2035 we have to zero out new sales of gasoline and diesel cars,” she said. 

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