Some Investors May Be Worried About Pinnacle West Capital's (NYSE:PNW) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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)

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)

0.037 = US$813m ÷ (US$24b - US$1.7b) (Based on the trailing twelve months to March 2023).

Thus, Pinnacle West Capital has an ROCE of 3.7%. In absolute terms, that's a low return but it's around 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.

SWOT Analysis for Pinnacle West Capital

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

When we looked at the ROCE trend at Pinnacle West Capital, we didn't gain much confidence. To be more specific, ROCE has fallen from 5.9% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

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. These trends are starting to be recognized by investors since the stock has delivered a 17% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Pinnacle West Capital does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.