Xcel Energy’s (NASDAQ:XEL) Returns On Capital Not Reflecting Well On The Business


Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put, simply these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don’t think Xcel Energy (NASDAQ:XEL) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Xcel Energy:

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

0.041 = US$2.2b ÷ (US$58b – US$5.4b) (Based on the trailing twelve months to March 2022).

Therefore, Xcel Energy has an ROCE of 4.1%. On its own, that’s a low figure but it’s around the 4.8% average generated by the Electric Utilities industry.

Check out our latest analysis for Xcel Energy

NasdaqGS:XEL Return on Capital Employed July 3rd 2022

In the above chart we have measured Xcel Energy’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 report for Xcel Energy.

How Are Returns Trending?

On the surface, the trend of ROCE at Xcel Energy doesn’t inspire confidence. Over the last five years, returns on capital have decreased to 4.1% from 5.9% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Xcel Energy’s ROCE

In summary, despite lower returns in the short term, we’re encouraged to see that Xcel Energy is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 83% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One final note, you should learn about the 3 warning signs we’ve spotted with Xcel Energy (including 1 which shouldn’t be ignored).

While Xcel Energy 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.

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.

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