Stock Analysis

The Returns On Capital At Entergy (NYSE:ETR) Don't Inspire Confidence

NYSE:ETR
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What trends should we look for it we want to identify stocks that can 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. Although, when we looked at Entergy (NYSE:ETR), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Entergy:

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

0.031 = US$1.6b ÷ (US$59b - US$6.2b) (Based on the trailing twelve months to September 2022).

Thus, Entergy has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 4.6%.

View our latest analysis for Entergy

roce
NYSE:ETR Return on Capital Employed November 22nd 2022

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 to see what analysts are forecasting going forward, you should check out our free report for Entergy.

The Trend Of ROCE

When we looked at the ROCE trend at Entergy, we didn't gain much confidence. Around five years ago the returns on capital were 4.3%, but since then they've fallen to 3.1%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Entergy's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Entergy. And the stock has followed suit returning a meaningful 59% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 2 warning signs we've spotted with Entergy (including 1 which doesn't sit too well with us) .

While Entergy 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.

Valuation is complex, but we're here to simplify it.

Discover if Entergy might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.