Yahoo Finance Public Service Enterprise Group (NYSE:PEG) Has More To Do To Multiply In Value Going Forward
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Public Service Enterprise Group (NYSE:PEG), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Public Service Enterprise Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.053 = US$2.5b ÷ (US$52b - US$5.4b) (Based on the trailing twelve months to March 2024).
Thus, Public Service Enterprise Group has an ROCE of 5.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.0%.
Check out our latest analysis for Public Service Enterprise Group
Above you can see how the current ROCE for Public Service Enterprise Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Public Service Enterprise Group .
The Trend Of ROCE
There hasn't been much to report for Public Service Enterprise Group's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Public Service Enterprise Group in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. That being the case, it makes sense that Public Service Enterprise Group has been paying out 62% of its earnings to its shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.
The Key Takeaway
In summary, Public Service Enterprise Group isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 42% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
One final note, you should learn about the 2 warning signs we've spotted with Public Service Enterprise Group (including 1 which shouldn't be ignored) .
While Public Service Enterprise Group 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.
