What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Evergy (NASDAQ:EVRG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Evergy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = US$1.2b ÷ (US$31b - US$4.8b) (Based on the trailing twelve months to September 2023).
So, Evergy has an ROCE of 4.6%. On its own, that's a low figure but it's around the 4.5% average generated by the Electric Utilities industry.
Above you can see how the current ROCE for Evergy 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 Evergy.
What Does the ROCE Trend For Evergy Tell Us?
Over the past five years, Evergy's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Evergy doesn't end up being a multi-bagger in a few years time. That being the case, it makes sense that Evergy has been paying out 69% of its earnings to its shareholders. Most shareholders probably know this and own the stock for its dividend.
Our Take On Evergy's ROCE
In summary, Evergy isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Unsurprisingly, the stock has only gained 2.3% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
One final note, you should learn about the 2 warning signs we've spotted with Evergy (including 1 which is a bit concerning) .
While Evergy 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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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.