Should You Be Impressed By Entergy's (NYSE:ETR) Returns on Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 Entergy (NYSE:ETR), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Entergy, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.04 = US$1.9b ÷ (US$53b - US$6.1b) (Based on the trailing twelve months to June 2020).

So, Entergy has an ROCE of 4.0%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 4.6%.

View our latest analysis for Entergy

roce

Above you can see how the current ROCE for Entergy compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Entergy Tell Us?

Things have been pretty stable at Entergy, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Entergy doesn't end up being a multi-bagger in a few years time. That being the case, it makes sense that Entergy has been paying out 64% of its earnings to its shareholders. Most shareholders probably know this and own the stock for its dividend.

The Bottom Line

We can conclude that in regards to Entergy's returns on capital employed and the trends, there isn't much change to report on. Since the stock has gained an impressive 97% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to know some of the risks facing Entergy we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

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.

This article by Simply Wall St is general in nature. 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.

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