Boralex (TSE:BLX) Will Want To Turn Around Its Return Trends

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. 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 Boralex (TSE:BLX) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Boralex, this is the formula:

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

0.033 = CA$174m ÷ (CA$5.7b - CA$383m) (Based on the trailing twelve months to June 2021).

Thus, Boralex has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 5.0%.

See our latest analysis for Boralex

In the above chart we have measured Boralex's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Boralex.

The Trend Of ROCE

When we looked at the ROCE trend at Boralex, we didn't gain much confidence. Around five years ago the returns on capital were 4.2%, but since then they've fallen to 3.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Boralex's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Boralex is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 138% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know more about Boralex, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

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

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.

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