Brookfield Renewable (TSE:BEPC) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Brookfield Renewable (TSE:BEPC), we don't think it's current trends fit the mold of a multi-bagger.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Brookfield Renewable:

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

0.041 = US$1.4b ÷ (US$43b - US$8.3b) (Based on the trailing twelve months to March 2023).

Thus, Brookfield Renewable has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 6.5%.

View our latest analysis for Brookfield Renewable

Above you can see how the current ROCE for Brookfield Renewable 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 report for Brookfield Renewable.

How Are Returns Trending?

On the surface, the trend of ROCE at Brookfield Renewable doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.1% from 6.0% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 19%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 4.1%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Brookfield Renewable's ROCE

While returns have fallen for Brookfield Renewable in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 4.2% over the last year. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing: We've identified 4 warning signs with Brookfield Renewable (at least 2 which are a bit unpleasant) , and understanding these would certainly be useful.

While Brookfield Renewable isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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

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.