Pinnacle West Capital (NYSE:PNW) May Have Issues Allocating Its Capital
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Pinnacle West Capital (NYSE:PNW), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
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 Pinnacle West Capital:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.037 = US$842m ÷ (US$24b - US$2.0b) (Based on the trailing twelve months to September 2023).
Thus, Pinnacle West Capital has an ROCE of 3.7%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 4.6%.
Check out our latest analysis for Pinnacle West Capital
Above you can see how the current ROCE for Pinnacle West Capital 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 analyst report for Pinnacle West Capital .
What Can We Tell From Pinnacle West Capital's ROCE Trend?
On the surface, the trend of ROCE at Pinnacle West Capital doesn't inspire confidence. Around five years ago the returns on capital were 5.2%, but since then they've fallen to 3.7%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Pinnacle West Capital. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
One final note, you should learn about the 2 warning signs we've spotted with Pinnacle West Capital (including 1 which is concerning) .
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
