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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 Public Service Enterprise Group (NYSE:PEG), we don't think it's current trends fit the mold of a multi-bagger.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)
0.056 = US$2.5b ÷ (US$50b - US$5.3b) (Based on the trailing twelve months to September 2020).
Thus, Public Service Enterprise Group has an ROCE of 5.6%. On its own, that's a low figure but it's around the 4.8% average generated by the Integrated Utilities industry.
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 Can We Tell From Public Service Enterprise Group's ROCE Trend?
In terms of Public Service Enterprise Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 9.4% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.
The Bottom Line On Public Service Enterprise Group's ROCE
To conclude, we've found that Public Service Enterprise Group is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 82% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
One more thing, we've spotted 1 warning sign facing Public Service Enterprise Group that you might find interesting.
While Public Service Enterprise Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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.
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