Returns On Capital At Phillips 66 (NYSE:PSX) Have Stalled

There are a few key trends to look for if we want to identify the next 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Phillips 66's (NYSE:PSX) trend of ROCE, we liked what we saw.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Phillips 66 is:

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

0.11 = US$6.6b ÷ (US$76b - US$18b) (Based on the trailing twelve months to March 2024).

So, Phillips 66 has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 13% generated by the Oil and Gas industry.

See our latest analysis for Phillips 66

roce

In the above chart we have measured Phillips 66'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 Phillips 66 .

How Are Returns Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 26% in that time. 11% is a pretty standard return, and it provides some comfort knowing that Phillips 66 has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Key Takeaway

To sum it up, Phillips 66 has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 114% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing, we've spotted 2 warning signs facing Phillips 66 that you might find interesting.

While Phillips 66 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.