Phillips 66 (NYSE:PSX) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Although, when we looked at Phillips 66 (NYSE:PSX), it didn't seem to tick all of these boxes.

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

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. Analysts use this formula to calculate it for Phillips 66:

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

0.028 = US$1.6b ÷ (US$76b - US$20b) (Based on the trailing twelve months to June 2025).

So, Phillips 66 has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 9.4%.

View our latest analysis for Phillips 66 NYSE:PSX Return on Capital Employed August 14th 2025

Above you can see how the current ROCE for Phillips 66 compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Phillips 66 .

So How Is Phillips 66's ROCE Trending?

When we looked at the ROCE trend at Phillips 66, we didn't gain much confidence. Around five years ago the returns on capital were 4.0%, but since then they've fallen to 2.8%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Phillips 66 have fallen, meanwhile the business is employing more capital than it was five years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 142%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Phillips 66 (of which 2 make us uncomfortable!) that you should know about.

Story Continues

While Phillips 66 isn't earning the highest return, check out this freelist of companies that are earning high returns on equity with solid balance sheets.

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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.