What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So on that note, Public Service Enterprise Group (NYSE:PEG) looks quite promising in regards to its trends of return on capital.

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. 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)

0.076 = US$3.5b ÷ (US$51b - US$5.1b) (Based on the trailing twelve months to December 2023).

Therefore, Public Service Enterprise Group has an ROCE of 7.6%. On its own that's a low return, but compared to the average of 4.9% generated by the Integrated Utilities industry, it's much better.

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, you can check out the forecasts from the analysts covering Public Service Enterprise Group for free.

What Can We Tell From Public Service Enterprise Group's ROCE Trend?

Public Service Enterprise Group's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 32% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Key Takeaway

To bring it all together, Public Service Enterprise Group has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 34% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing: We've identified 3 warning signs with Public Service Enterprise Group (at least 2 which are a bit concerning) , and understanding these would certainly be useful.

While Public Service Enterprise Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.