What trends should we look for it we want to identify stocks that can 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at PG&E (NYSE:PCG), it didn't seem to tick all of these boxes.
Understanding 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 PG&E:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = US$2.6b ÷ (US$123b - US$15b) (Based on the trailing twelve months to September 2023).
So, PG&E has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 4.5%.
NYSE:PCG Return on Capital Employed February 7th 2024
In the above chart we have measured PG&E'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 PG&E.
How Are Returns Trending?
When we looked at the ROCE trend at PG&E, we didn't gain much confidence. To be more specific, ROCE has fallen from 4.4% over the last five years. However it looks like PG&E might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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 PG&E's ROCE
To conclude, we've found that PG&E is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 6.8% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
One final note, you should learn about the 3 warning signs we've spotted with PG&E (including 1 which can't be ignored) .
While PG&E 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.
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