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To compare electrical-equipment stocks, align peer definitions first, then test three connected questions: how efficiently each company uses capital (ROCE), how much contracted work can become sales (order book), and whether reported profit becomes operating and free cash flow. A high ROCE is not enough to buy a stock, a large backlog does not guarantee growth, and accounting profit can rise while cash is tied up in receivables or inventory.
This framework separates electrical distribution, automation, electrification, power-management and diversified industrial companies; normalizes their accounting; checks backlog quality and conversion; reconciles earnings to cash; and ranks businesses with a disclosed, sensitivity-tested scorecard.
Start with a genuinely comparable peer set
Electrical-equipment companies often combine businesses with different economics. A switchgear manufacturer, an industrial-automation supplier and a diversified conglomerate may all report an “electrical” segment, yet differ in project duration, capital intensity, service revenue and cyclicality. Define the peer set before collecting ratios.
Classify the business model
- Electrical distribution: low- and medium-voltage equipment sold through distributors and contractors; demand can track construction and inventory cycles.
- Automation: controls, drives, software and services; recurring software or service revenue may support margins and cash conversion.
- Electrification and power management: equipment for buildings, data centers, utilities, transport and industry; projects can create long backlogs and working-capital swings.
- Diversified industrials: several unrelated segments whose consolidated ROCE, backlog and cash flow can hide weak or exceptional divisions.
Record fiscal year-end, reporting currency, consolidation scope (group or segment), acquisition dates and any discontinued operations. Compare the same period wherever possible. If one company reports a September year-end and another a December year-end, note the mismatch rather than implying a single-cycle comparison.
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Build a data sheet before calculating
Capture revenue, operating profit, effective tax rate, cash taxes, total debt, lease liabilities, pension deficits or surpluses, goodwill, other intangibles, equity, cash, working-capital balances, capital expenditure, order intake, backlog and segment margins. Save the company’s own ROCE definition beside your normalized calculation; differences in terminology are often the largest source of false precision.
How to make ROCE comparable
ROCE asks how much operating profit a business earns from the capital committed to it. The headline ratio is useful only when numerator, denominator, period and accounting adjustments match.
Use a consistent formula
A practical cross-company version is:
ROCE = NOPAT ÷ average invested capital
NOPAT is operating profit after a normalized tax charge. Average invested capital is generally the average of beginning- and ending-period operating assets less operating liabilities, with financing and accounting adjustments applied consistently. Use average rather than year-end capital when acquisitions, disposals or large projects change the asset base during the year.
Companies may instead use EBIT divided by average capital employed, operating profit after reported tax, or a balance-sheet snapshot. Do not mix those definitions in a league table. Recalculate every peer using one documented policy and show the company-reported figure separately.
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Decide what belongs in invested capital
- Goodwill and acquired intangibles: including them measures returns on the price actually paid for acquisitions; excluding them measures returns on the operating assets after acquisition. Use one policy for all peers and explain the choice.
- Leases: include right-of-use assets and lease liabilities when comparing companies that lease factories or warehouses differently from those that own them.
- Pensions: treat funded pension assets and deficits consistently; a deficit can represent capital that must be funded even if it is not in ordinary working capital.
- Taxes: normalize unusual tax rates, one-time tax benefits and jurisdictional changes. A low reported tax rate can temporarily inflate NOPAT.
- Exceptional items: remove genuinely non-recurring restructuring or litigation effects, but do not remove recurring “exceptional” charges simply because they are inconvenient.
- Acquisitions: include acquired capital from the closing date and consider a pro-forma operating contribution when a transaction closes late in the year.
Read the five-year trend, not one peak year
Calculate annual normalized ROCE for at least five years and annotate acquisitions, divestitures, recessions, major price increases and capacity expansions. A stable 16% ROCE may be more investable than a single 25% result followed by a collapse. Compare each year with the company’s cost of capital: ROCE above that hurdle creates economic value; ROCE below it destroys value even if accounting profit is positive.
ABB reported 25.3% ROCE for 2025 on its key-figures page. ABB’s 2024 financial report stated, “our Return on Capital Employed (ROCE) target remains to be above 18 percent excluding transformative deals.” Treat the 2025 figure and the target as company-reported measures until you rebuild them under a common policy.
Siemens’ fiscal 2025 report cited a 19.1% prior-year ROCE reference and said fiscal-2025 ROCE was lower because average capital employed increased, including through acquisitions. That illustrates why a falling ratio is not automatically an operational failure: the denominator can rise before synergies and earnings arrive.
Test whether the order book has economic value
Backlog measures visibility, not guaranteed profit. A credible analysis connects order intake to backlog growth, delivery timing, margin and cash collection.
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Collect the core backlog indicators
- Order intake: new orders signed during the period.
- Book-to-bill: order intake divided by revenue. Above 1 generally expands backlog; below 1 draws it down, subject to currency and scope effects.
- Ending backlog: the contracted work not yet recognized as revenue under the company’s definition.
- Backlog growth: report organic growth separately from acquisitions and foreign-exchange movements.
- Expected delivery period: distinguish work scheduled within 12 months from multi-year projects.
- Cancellation and termination rights: identify whether customers can cancel for convenience, delay acceptance or renegotiate price.
- Customer and geography concentration: a large project or one country can make backlog volatile.
- Segment margin: backlog with thin or negative margin is not equivalent to high-quality backlog.
Estimate conversion instead of celebrating the headline
Ask what proportion of beginning backlog became revenue during the year and whether new orders replaced it. A simple conversion analysis starts with beginning backlog, adds order intake, subtracts recognized revenue and cancellations, and reconciles to ending backlog. Differences can arise from currency, acquisitions and accounting reclassifications, so label the bridge clearly.
Check whether delivery schedules are realistic. Long lead times may reflect healthy capacity constraints, but they can also defer revenue while input costs, engineering costs and financing needs rise. Compare backlog growth with inventory, contract assets and customer advances: a rapid backlog increase accompanied by large unbilled receivables deserves scrutiny.
ABB reported a $25.282 billion order backlog for 2025. The number indicates visibility, but its investment value depends on when that backlog converts, the margin embedded in contracts and the cash terms negotiated with customers.
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Look for margin risk inside the backlog
- Fixed-price contracts can lose margin when copper, electronics, labor or freight costs rise.
- Milestone billing can produce customer advances and positive cash flow before revenue, while unbilled work can consume cash.
- Engineering changes and delayed site access can create claims, provisions or cancellation disputes.
- Large utility, data-center or infrastructure projects may have attractive growth but concentrated execution risk.
Read segment disclosures and contract provisions rather than assuming the group’s current margin applies to all future backlog.
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Audit whether earnings turn into cash
Start with the indirect cash-flow reconciliation: net income, non-cash charges, changes in working capital and other operating items produce operating cash flow (OCF). Then subtract maintenance and growth capital expenditure to derive free cash flow (FCF). Companies define FCF differently, so state whether your measure is OCF minus total capex, net capex, or another published convention.
Inspect each working-capital movement
- Receivables: growth faster than sales can signal weaker collections, longer customer terms or unbilled revenue.
- Inventory: builds may support backlog fulfillment, but obsolete or excess stock eventually requires markdowns or cash release.
- Contract assets: revenue recognized before billing can depress cash despite strong reported earnings.
- Customer advances and contract liabilities: can boost OCF before delivery; do not treat the inflow as permanently recurring.
- Provisions: reversals can lift cash or profit in one period without representing ongoing performance.
- One-off releases: working-capital reductions after a downturn can make OCF look unusually strong.
Calculate OCF conversion as OCF divided by net income over a single year and cumulatively over five years. A ratio below 1 is not automatically bad in a capacity-expansion year, but persistent shortfalls require an explanation tied to receivables, inventory, contract assets or accounting differences.
Separate maintenance from growth capex
FCF is only meaningful when capex is classified consistently. Maintenance capex keeps existing capacity operating; growth capex adds factories, automation or service capacity. A company with heavy growth capex may show lower current FCF while building the ability to convert backlog later. Conversely, labeling routine replacement spending as “growth” can make cash generation look stronger than it is.
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Schneider Electric reported €6.308 billion OCF and €4.216 billion FCF in 2024, while identifying a €594 million working-capital drag on FCF. The drag shows why a strong absolute FCF figure still needs a bridge explaining inventory, receivables and contract timing. Schneider’s release stated: “The Group delivered Free Cash Flow of €4,216 million in 2024”.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Use leverage, concentration and acquisitions as risk modifiers
ROCE and cash flow should be read with balance-sheet resilience. Record net debt, lease liabilities, pension obligations, interest coverage and maturity dates. High leverage can magnify equity returns in a good cycle but restrict investment when orders slow. Compare debt with recurring operating cash flow, not only EBITDA, and check whether acquisitions were funded with debt, shares or existing cash.
Map exposure by customer, geography and end market. Data centers, utilities, buildings, transport, factories and residential construction can move on different cycles. A company with diversified revenue may still depend on a few customers for its largest projects. Concentration does not make a stock uninvestable; it changes the discount rate and the stress cases you should model.
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Build a transparent comparison scorecard
Publish weights before looking at the ranking. One example is a 100-point scorecard:
| Factor | Suggested weight | What to measure |
|---|---|---|
| ROCE level and five-year stability | 20 | Normalized ROCE, volatility and years above cost of capital |
| ROCE versus cost of capital | 10 | Economic profit spread after consistent adjustments |
| Order intake and backlog growth | 15 | Organic intake, book-to-bill and backlog trend |
| Backlog conversion and margin | 15 | Delivery schedule, realized margin and cancellation terms |
| Operating- and free-cash-flow conversion | 20 | Five-year OCF/net income, FCF and working-capital quality |
| Capex intensity | 5 | Capex/revenue and maintenance versus growth needs |
| Leverage and acquisition burden | 10 | Net debt, leases, pensions and post-deal capital employed |
| Customer, geography and end-market concentration | 5 | Exposure to individual projects, regions and cycles |
Score each factor on a defined scale, such as 1 (weak), 3 (middle) and 5 (strong), multiply by the weight and show the underlying numbers. Run sensitivity checks by changing the largest weights, using a normalized rather than reported ROCE, or excluding a one-time working-capital release. If a company wins only under one set of assumptions, describe the result as fragile.
Stress-test the ranking
- Reduce backlog conversion speed and delay a portion of revenue by one year.
- Lower segment margin on fixed-price projects to reflect input-cost inflation.
- Extend customer collection days and increase inventory days.
- Add acquisition-related capital before assuming synergies.
- Raise the cost of capital in a higher-rate scenario.
- Recalculate FCF after maintenance capex rather than total capex if the published measure mixes both.
The objective is not a mathematically precise target price. It is to identify which conclusions survive reasonable changes in timing, margins, taxes and capital definitions.
A practical comparison workflow
- Define scope: choose business-model peers, fiscal period, currency and group or segment basis.
- Extract reported definitions: copy each company’s ROCE, backlog, OCF and FCF formulas into your worksheet.
- Normalize ROCE: calculate NOPAT over average invested capital with a written policy for goodwill, leases, pensions, taxes, exceptional items and acquisitions.
- Build the backlog bridge: reconcile opening backlog, orders, revenue, cancellations, currency and closing backlog.
- Test conversion: compare backlog delivery with segment margins, contract terms, customer advances and contract assets.
- Reconcile cash: walk from net income to OCF, identify every major working-capital movement, then subtract consistently defined capex.
- Check resilience: add leverage, concentration, pension and acquisition effects to the operating analysis.
- Score and stress-test: disclose weights, assumptions and alternate scenarios before reaching a ranking.
- Document exceptions: flag fiscal-year mismatches, major acquisitions, disposals, currency effects and unusual one-time cash movements.
Common mistakes and how to correct them
- Buying on high ROCE alone: correct by checking the five-year trend, cost-of-capital spread and whether goodwill was excluded.
- Treating backlog as guaranteed revenue: correct by examining cancellation rights, delivery timing, margin and customer concentration.
- Using one year of cash flow: correct by reviewing five-year conversion and identifying inventory or receivable releases.
- Ignoring capex required to serve growth: correct by separating maintenance and expansion spending and testing FCF after both.
- Comparing consolidated metrics with segment metrics: correct by keeping the reporting scope identical.
- Letting an acquisition decide the ranking: correct by showing pre-deal ROCE, acquired capital, integration costs and the time needed for synergies.
- Confusing currency with growth: correct by separating organic, acquisition and foreign-exchange effects in orders, revenue and backlog.
What a high-quality conclusion looks like
The strongest candidate is not necessarily the company with the highest current ROCE or largest order book. Look for a durable spread above the cost of capital, backlog that converts on schedule at defendable margins, and multi-year cash generation after the capex needed to sustain and expand the business. Then discount the result for leverage, concentration, contract risk and acquisition execution. A durable combination of ROCE, backlog conversion and cash generation is more informative than any single metric.
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