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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Public Service Enterprise Group (NYSE:PEG), we don't think it's current trends fit the mold of a multi-bagger.
What Is 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. The formula for this calculation on Public Service Enterprise Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = US$2.7b ÷ (US$54b - US$5.9b) (Based on the trailing twelve months to September 2024).
Therefore, Public Service Enterprise Group has an ROCE of 5.6%. In absolute terms, that's a low return but it's around the Integrated Utilities industry average of 5.1%.
Check out our latest analysis for Public Service Enterprise Group
In the above chart we have measured Public Service Enterprise Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Public Service Enterprise Group .
How Are Returns Trending?
There hasn't been much to report for Public Service Enterprise Group's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Public Service Enterprise Group to be a multi-bagger going forward. That being the case, it makes sense that Public Service Enterprise Group has been paying out 61% of its earnings to its shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.
The Bottom Line
In summary, Public Service Enterprise Group isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 76% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.