When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at PPL (NYSE:PPL), we've spotted some signs that it could be struggling, so let's investigate.
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. The formula for this calculation on PPL is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = US$1.5b ÷ (US$39b - US$2.9b) (Based on the trailing twelve months to September 2023).
Thus, PPL has an ROCE of 4.3%. Even though it's in line with the industry average of 4.4%, it's still a low return by itself.
See 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'd like, you can check out the forecasts from the analysts covering PPL here for free.
What The Trend Of ROCE Can Tell Us
There is reason to be cautious about PPL, given the returns are trending downwards. About five years ago, returns on capital were 8.3%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. If these trends continue, we wouldn't expect PPL to turn into a multi-bagger.
In Conclusion...
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 17% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that 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 may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
