We're Watching These Trends At PPL (NYSE:PPL)
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think PPL (NYSE:PPL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. The formula for this calculation on PPL is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.073 = US$3.1b ÷ (US$48b - US$5.4b) (Based on the trailing twelve months to September 2020).
Thus, PPL has an ROCE of 7.3%. On its own that's a low return, but compared to the average of 4.6% generated by the Electric Utilities industry, it's much better.
See our latest analysis for PPL
In the above chart we have measured PPL's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering PPL here for free.
What The Trend Of ROCE Can Tell Us
In terms of PPL's historical ROCE trend, it doesn't exactly demand attention. The company has employed 22% more capital in the last five years, and the returns on that capital have remained stable at 7.3%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line
In conclusion, PPL has been investing more capital into the business, but returns on that capital haven't increased. And with the stock having returned a mere 9.7% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
One more thing: We've identified 3 warning signs with PPL (at least 2 which are a bit unpleasant) , and understanding these would certainly be useful.
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.
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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