Investors Met With Slowing Returns on Capital At Serena Energia (BVMF:SRNA3)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Serena Energia (BVMF:SRNA3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Serena Energia, this is the formula:

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

0.056 = R$926m ÷ (R$19b - R$2.5b) (Based on the trailing twelve months to March 2024).

Therefore, Serena Energia has an ROCE of 5.6%. Even though it's in line with the industry average of 6.5%, it's still a low return by itself.

See our latest analysis for Serena Energia

In the above chart we have measured Serena Energia's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Serena Energia .

The Trend Of ROCE

In terms of Serena Energia's historical ROCE trend, it doesn't exactly demand attention. The company has employed 274% more capital in the last five years, and the returns on that capital have remained stable at 5.6%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Serena Energia's ROCE

As we've seen above, Serena Energia's returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 20% in the last five years. Therefore based on the analysis done in this article, we don't think Serena Energia has the makings of a multi-bagger.

On a final note, we found 2 warning signs for Serena Energia (1 doesn't sit too well with us) you should be aware of.

While Serena Energia isn't earning the highest return, check out this free list 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com