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Capital Allocation Trends At Duke Energy (NYSE:DUK) Aren't Ideal

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Simply Wall St
·3 min read
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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Duke Energy (NYSE:DUK), we don't think it's current trends fit the mold of a multi-bagger.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Duke Energy:

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

0.037 = US$5.5b ÷ (US$162b - US$16b) (Based on the trailing twelve months to December 2020).

Therefore, Duke Energy has an ROCE of 3.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.5%.

See our latest analysis for Duke Energy

roce
roce

Above you can see how the current ROCE for Duke Energy 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 Duke Energy.

What Does the ROCE Trend For Duke Energy Tell Us?

In terms of Duke Energy's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 4.7%, but since then they've fallen to 3.7%. However it looks like Duke Energy might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

Our Take On Duke Energy's ROCE

In summary, Duke Energy is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 45% 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.

If you'd like to know more about Duke Energy, we've spotted 6 warning signs, and 1 of them makes us a bit uncomfortable.

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.