Public Service Enterprise Group (NYSE:PEG) Has Some Difficulty Using Its Capital Effectively

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Public Service Enterprise Group (NYSE:PEG) we aren't filled with optimism, but let's investigate further.

Understanding 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. To calculate this metric for Public Service Enterprise Group, this is the formula:

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

0.045 = US$1.9b ÷ (US$49b - US$6.7b) (Based on the trailing twelve months to December 2022).

So, Public Service Enterprise Group has an ROCE of 4.5%. In absolute terms, that's a low return but it's around the Integrated Utilities industry average of 5.0%.

Check out our latest analysis for Public Service Enterprise Group

In the above chart we have measured Public Service Enterprise Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Public Service Enterprise Group's ROCE Trend?

There is reason to be cautious about Public Service Enterprise Group, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 6.2% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Public Service Enterprise Group becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Public Service Enterprise Group is generating lower returns from the same amount of capital. However the stock has delivered a 44% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Public Service Enterprise Group does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are 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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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.