Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Pinnacle West Capital (NYSE:PNW), we don't think it's current trends fit the mold of a multi-bagger.
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. The formula for this calculation on Pinnacle West Capital is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = US$1.1b ÷ (US$26b - US$2.8b) (Based on the trailing twelve months to December 2024).
Therefore, Pinnacle West Capital has an ROCE of 4.6%. Even though it's in line with the industry average of 4.9%, it's still a low return by itself.
See our latest analysis for Pinnacle West Capital
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'd like, you can check out the forecasts from the analysts covering Pinnacle West Capital for free.
The Trend Of ROCE
In terms of Pinnacle West Capital's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 4.6% for the last five years, and the capital employed within the business has risen 42% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line On Pinnacle West Capital's ROCE
As we've seen above, Pinnacle West Capital's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 50% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
On a final note, we found 2 warning signs for Pinnacle West Capital (1 doesn't sit too well with us) you should be aware of.
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.
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.