Stock Analysis

Investors Met With Slowing Returns on Capital At TransAlta Renewables (TSE:RNW)

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TSX:RNW
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think TransAlta Renewables (TSE:RNW) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. The formula for this calculation on TransAlta Renewables is:

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

0.042 = CA$122m ÷ (CA$3.2b - CA$306m) (Based on the trailing twelve months to December 2022).

So, TransAlta Renewables has an ROCE of 4.2%. Even though it's in line with the industry average of 3.8%, it's still a low return by itself.

See our latest analysis for TransAlta Renewables

roce
TSX:RNW Return on Capital Employed March 17th 2023

In the above chart we have measured TransAlta Renewables' 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 report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for TransAlta Renewables' returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if TransAlta Renewables doesn't end up being a multi-bagger in a few years time. That being the case, it makes sense that TransAlta Renewables has been paying out 145% of its earnings to its shareholders. Most shareholders probably know this and own the stock for its dividend.

What We Can Learn From TransAlta Renewables' ROCE

In summary, TransAlta Renewables isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors may be recognizing these trends since the stock has only returned a total of 39% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know more about TransAlta Renewables, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

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.

Valuation is complex, but we're helping make it simple.

Find out whether TransAlta Renewables is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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