Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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 PG&E (NYSE:PCG) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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 PG&E, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = US$3.0b ÷ (US$121b - US$13b) (Based on the trailing twelve months to June 2023).
Therefore, PG&E has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 4.5%.
See our latest analysis for PG&E
NYSE:PCG Return on Capital Employed October 27th 2023
Above you can see how the current ROCE for PG&E compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for PG&E.
What Can We Tell From PG&E's ROCE Trend?
When we looked at the ROCE trend at PG&E, we didn't gain much confidence. Around five years ago the returns on capital were 4.8%, but since then they've fallen to 2.8%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.
Our Take On PG&E's ROCE
In summary, PG&E is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 66% in the last five years. Therefore based on the analysis done in this article, we don't think PG&E has the makings of a multi-bagger.
PG&E does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...
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.
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