Pinnacle West Capital (NYSE:PNW) Might Be Having Difficulty Using Its Capital Effectively

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating Pinnacle West Capital (NYSE:PNW), we don't think it's current trends fit the mold of a multi-bagger.

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. 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)

0.034 = US$758m ÷ (US$24b - US$1.9b) (Based on the trailing twelve months to June 2023).

So, Pinnacle West Capital has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 4.5%.

View our latest analysis for Pinnacle West Capital

In the above chart we have measured Pinnacle West Capital'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 Pinnacle West Capital's ROCE Trend?

When we looked at the ROCE trend at Pinnacle West Capital, we didn't gain much confidence. Around five years ago the returns on capital were 5.6%, but since then they've fallen to 3.4%. 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.

What We Can Learn From Pinnacle West Capital'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 Pinnacle West Capital. In light of this, the stock has only gained 22% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you'd like to know more about Pinnacle West Capital, we've spotted 3 warning signs, and 2 of them can't be ignored.

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.