Returns on Capital Signal Hard times ahead for Xcel Energy (NASDAQ: XEL)

If you are looking for a multi-bagger, there are a few things to look out for. Generally, we will want to notice a growing trend to recover on capital employed (ROCE) and at the same time, a based capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. In light of this, when we looked at Xcel Energy (NASDAQ: XEL) and its ROCE trend, we weren’t exactly thrilled.

Understanding Return on Capital Employed (ROCE)

For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. To calculate this metric for Xcel Energy, here is the formula:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.042 = US $ 2.2B ÷ (US $ 57B – US $ 5.0B) (Based on the last twelve months up to June 2021).

Therefore, Xcel Energy has a ROCE of 4.2%. In absolute terms, this is poor performance, but it sits around the electric utility industry average of 4.6%.

See our latest review for Xcel Energy

Above you can see how Xcel Energy’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Xcel Energy.

What does the ROCE trend tell us for Xcel Energy?

When we looked at the ROCE trend at Xcel Energy, we didn’t gain much confidence. Over the past five years, return on capital has declined to 4.2% from 6.0% five years ago. However, as both capital employed and income have increased, it appears that the company is currently continuing to grow, resulting in short-term returns. If these investments prove to be successful, it can bode very well for stock performance in the long run.

The bottom line

As returns have plummeted for Xcel Energy lately, we are encouraged to see sales increasing and the company reinvesting in its operations. In addition, the stock has climbed 83% in the past five years, it seems investors are optimistic about the future. So if these growth trends continue, we would be optimistic about the future of the title.

One more thing: we have identified 3 warning signs with Xcel Energy (at least 1 which makes us a bit uncomfortable), and understanding them would definitely help.

If you want to look for solid businesses with great income, check out this free list of companies with good balance sheets and impressive returns on equity.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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