If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Pinnacle West Capital (NYSE:PNW) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Pinnacle West Capital, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.045 = US$1.0b ÷ (US$26b - US$3.1b) (Based on the trailing twelve months to June 2024).
Therefore, Pinnacle West Capital has an ROCE of 4.5%. On its own, that's a low figure but it's around the 4.7% average generated by the Electric Utilities industry.
In the above chart we have measured Pinnacle West Capital's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Pinnacle West Capital .
What Does the ROCE Trend For Pinnacle West Capital Tell Us?
There are better returns on capital out there than what we're seeing at Pinnacle West Capital. Over the past five years, ROCE has remained relatively flat at around 4.5% and the business has deployed 39% more capital into its operations. 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 summary, Pinnacle West Capital has simply been reinvesting capital and generating the same low rate of return as before. And investors may be recognizing these trends since the stock has only returned a total of 18% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Pinnacle West Capital (of which 1 is significant!) that you should know about.
While Pinnacle West Capital 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.