Is There More Growth In Store For EVN's (VIE:EVN) Returns On Capital?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in EVN's (VIE:EVN) returns on capital, so let's have a look.

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. The formula for this calculation on EVN is:

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

0.028 = €196m ÷ (€7.8b - €769m) (Based on the trailing twelve months to June 2020).

So, EVN has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 6.7%.

Check out our latest analysis for EVN

In the above chart we have measured EVN's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering EVN here for free.

What Can We Tell From EVN's ROCE Trend?

EVN has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 2.8% which is a sight for sore eyes. Not only that, but the company is utilizing 33% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From EVN's ROCE

Long story short, we're delighted to see that EVN's reinvestment activities have paid off and the company is now profitable. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 84% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

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.

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