Returns On Capital At Xcel Energy (NASDAQ:XEL) Have Hit The Brakes

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Xcel Energy (NASDAQ:XEL), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Xcel Energy, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.044 = US$2.5b ÷ (US$62b - US$5.2b) (Based on the trailing twelve months to June 2023).

Thus, Xcel Energy has an ROCE of 4.4%. Even though it's in line with the industry average of 4.5%, it's still a low return by itself.

See our latest analysis for Xcel Energy

Above you can see how the current ROCE for Xcel Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Xcel Energy here for free.

What The Trend Of ROCE Can Tell Us

In terms of Xcel Energy's historical ROCE trend, it doesn't exactly demand attention. The company has employed 41% more capital in the last five years, and the returns on that capital have remained stable at 4.4%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

As we've seen above, Xcel Energy's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 38% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One final note, you should learn about the 2 warning signs we've spotted with Xcel Energy (including 1 which is a bit unpleasant) .

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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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.