Investors Met With Slowing Returns on Capital At Pinnacle West Capital (NYSE:PNW)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Pinnacle West Capital (NYSE:PNW) 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)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Pinnacle West Capital, this is the formula:

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

0.045 = US$1.0b ÷ (US$26b - US$3.1b) (Based on the trailing twelve months to June 2024).

So, Pinnacle West Capital has an ROCE of 4.5%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 4.7%.

See our latest analysis for Pinnacle West Capital

Above you can see how the current ROCE for Pinnacle West Capital 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 analyst report for Pinnacle West Capital .

What Does the ROCE Trend For Pinnacle West Capital Tell Us?

The returns on capital haven't changed much for Pinnacle West Capital in recent years. The company has consistently earned 4.5% for the last five years, and the capital employed within the business has risen 39% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On Pinnacle West Capital's ROCE

In conclusion, Pinnacle West Capital has been investing more capital into the business, but returns on that capital haven't increased. And with the stock having returned a mere 14% 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.

One final note, you should learn about the 3 warning signs we've spotted with Pinnacle West Capital (including 1 which is significant) .

While Pinnacle West Capital 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.