There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at OGE Energy (NYSE:OGE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. Analysts use this formula to calculate it for OGE Energy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = US$508m ÷ (US$10b - US$517m) (Based on the trailing twelve months to September 2020).
Therefore, OGE Energy has an ROCE of 5.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.5%.
Above you can see how the current ROCE for OGE 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 OGE Energy here for free.
The Trend Of ROCE
There hasn't been much to report for OGE Energy's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if OGE Energy doesn't end up being a multi-bagger in a few years time. That probably explains why OGE Energy has been paying out 74% of its earnings as dividends to 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.
In a nutshell, OGE Energy has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 44% 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.
One final note, you should learn about the 3 warning signs we've spotted with OGE Energy (including 1 which is significant) .
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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