There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Public Service Enterprise Group (NYSE:PEG) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Public Service Enterprise Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.087 = US$3.8b ÷ (US$50b – US$5.2b) (Based on the trailing twelve months to September 2023).
Therefore, Public Service Enterprise Group has an ROCE of 8.7%. On its own that’s a low return, but compared to the average of 5.1% generated by the Integrated Utilities industry, it’s much better.
Check out our latest analysis for Public Service Enterprise Group
In the above chart we have measured Public Service Enterprise 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 report for Public Service Enterprise Group.
What Does the ROCE Trend For Public Service Enterprise Group Tell Us?
Public Service Enterprise Group is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 57% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it’s worth exploring what management has said about growth plans going forward.
The Bottom Line
To bring it all together, Public Service Enterprise Group has done well to increase the returns it’s generating from its capital employed. Considering the stock has delivered 40% to its stockholders over the last five years, it may be fair to think that investors aren’t fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.
Public Service Enterprise Group does have some risks, we noticed 3 warning signs (and 2 which are significant) we think you should know about.
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.
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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.
