Capital Allocation Trends At Edisun Power Europe (VTX:ESUN) Aren't Ideal

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Edisun Power Europe (VTX:ESUN), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Edisun Power Europe, this is the formula:

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

0.024 = CHF4.2m ÷ (CHF202m - CHF24m) (Based on the trailing twelve months to December 2020).

Thus, Edisun Power Europe has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 5.0%.

Check out our latest analysis for Edisun Power Europe

Historical performance is a great place to start when researching a stock so above you can see the gauge for Edisun Power Europe's ROCE against it's prior returns. If you're interested in investigating Edisun Power Europe's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Edisun Power Europe doesn't inspire confidence. Around five years ago the returns on capital were 5.1%, but since then they've fallen to 2.4%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Edisun Power Europe's ROCE

We're a bit apprehensive about Edisun Power Europe because despite more capital being deployed in the business, returns on that capital and sales have both fallen. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 204%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Edisun Power Europe does have some risks though, and we've spotted 1 warning sign for Edisun Power Europe that you might be interested in.

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. 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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