Entergy (NYSE:ETR) Has Some Way To Go To Become A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Entergy (NYSE:ETR) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on Entergy is:

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

0.049 = US$2.6b ÷ (US$60b - US$5.9b) (Based on the trailing twelve months to June 2023).

Therefore, Entergy has an ROCE of 4.9%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 4.5%.

Check out our latest analysis for Entergy

Above you can see how the current ROCE for Entergy 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 Entergy here for free.

So How Is Entergy's ROCE Trending?

The returns on capital haven't changed much for Entergy in recent years. The company has employed 30% more capital in the last five years, and the returns on that capital have remained stable at 4.9%. 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.

What We Can Learn From Entergy's ROCE

Long story short, while Entergy has been reinvesting its capital, the returns that it's generating haven't increased. And with the stock having returned a mere 34% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we found 3 warning signs for Entergy (1 can't be ignored) you should be aware of.

While Entergy isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.