Cenergy Holdings (EBR:CENER) Is Looking To Continue Growing Its Returns On Capital
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Speaking of which, we noticed some great changes in Cenergy Holdings' (EBR:CENER) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
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. To calculate this metric for Cenergy Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = €100m ÷ (€1.7b - €1.2b) (Based on the trailing twelve months to December 2022).
Therefore, Cenergy Holdings has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 13% generated by the Electrical industry.
See our latest analysis for Cenergy Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Cenergy Holdings' ROCE against it's prior returns. If you're interested in investigating Cenergy Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
The trends we've noticed at Cenergy Holdings are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 60% more capital is being employed now too. So we're very much inspired by what we're seeing at Cenergy Holdings thanks to its ability to profitably reinvest capital.
Another thing to note, Cenergy Holdings has a high ratio of current liabilities to total assets of 69%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Key Takeaway
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Cenergy Holdings has. Since the stock has returned a staggering 194% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
On a final note, we've found 2 warning signs for Cenergy Holdings that we think you should be aware of.
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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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.
Cenergy Holdings SA manufactures and sells aluminum, copper, cable, steel and steel pipes, and other products worldwide.
Solid track record and slightly overvalued.