What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Xcel Energy (NASDAQ:XEL), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Xcel Energy, this is the formula:

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

0.045 = US$2.6b ÷ (US$64b - US$5.7b) (Based on the trailing twelve months to December 2023).

So, Xcel Energy has an ROCE of 4.5%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 4.6%.

Check out our latest analysis for Xcel Energy

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 analyst report for Xcel Energy .

So How Is Xcel Energy's ROCE Trending?

In terms of Xcel Energy's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 4.5% for the last five years, and the capital employed within the business has risen 41% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Xcel Energy's ROCE

As we've seen above, Xcel Energy's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think Xcel Energy has the makings of a multi-bagger.

If you'd like to know more about Xcel Energy, we've spotted 2 warning signs, and 1 of them 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.

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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.