To find multi-bagger stock, what are the underlying trends we need to look for in a business? In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. In light of this, when we looked at Public Service Enterprise Group (NYSE: PEG) and its ROCE trend, we weren’t exactly thrilled.
Return on capital employed (ROCE): what is it?
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. To calculate this metric for Public Service Enterprise Group, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.048 = US $ 2.1 billion ÷ (US $ 49 billion – US $ 4.5 billion) (Based on the last twelve months up to June 2021).
So, The Public Service Enterprise Group posted a ROCE of 4.8%. On its own, this is a low return on capital, but it is in line with the industry average returns of 4.6%.
Check out our latest analysis for Public Service Enterprise Group
In the graph above, we measured the past ROCE of the Public Service Enterprise Group against its past performance, but the future is arguably more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for the Public Service Enterprise Group.
The ROCE trend
In terms of the historic ROCE movements of the Public Service Companies Group, the trend is not fantastic. About five years ago, returns on capital were 7.0%, but since then they have fallen to 4.8%. On the flip side, the company has employed more capital with no corresponding improvement in sales over the past year, which might suggest that these investments are longer-term games. It’s worth keeping an eye on the company’s profits from now on to see if those investments end up contributing to the bottom line.
The bottom line
To conclude, we have seen that Public Service Enterprise Group is reinvesting in the business, but the returns are declining. Although the market should expect these trends to improve as the stock has gained 77% over the past five years. Ultimately, if the underlying trends persist, we won’t be holding our breath that this is multi-bagging in the future.
On a separate note we have found 1 warning sign for Group of public service companies you will probably want to know more.
While Public Service Enterprise Group does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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