What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into PPL (NYSE:PPL), the trends above didn't look too great.
Return On Capital Employed (ROCE): What Is It?
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 PPL:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = US$1.9b ÷ (US$40b - US$2.3b) (Based on the trailing twelve months to September 2024).
So, PPL has an ROCE of 5.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.7%.
View our latest analysis for PPL
In the above chart we have measured PPL'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 analyst report for PPL .
What Can We Tell From PPL's ROCE Trend?
There is reason to be cautious about PPL, given the returns are trending downwards. To be more specific, the ROCE was 7.6% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on PPL becoming one if things continue as they have.
What We Can Learn From PPL's ROCE
In summary, it's unfortunate that PPL is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 12% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
If you'd like to know about the risks facing PPL, we've discovered 2 warning signs that you should be aware of.
While PPL 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.
About NYSE:PPL
PPL
An energy company, focuses on providing electricity and natural gas to approximately 3.6 million customers in the United States.
Acceptable track record with imperfect balance sheet.
