Our Take On The Returns On Capital At Edisun Power Europe (VTX:ESUN)

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Edisun Power Europe (VTX:ESUN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Edisun Power Europe, this is the formula:

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

0.031 = CHF5.1m ÷ (CHF172m - CHF9.3m) (Based on the trailing twelve months to June 2020).

Thus, Edisun Power Europe has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 6.1%.

View 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?

We weren't thrilled with the trend because Edisun Power Europe's ROCE has reduced by 30% over the last five years, while the business employed 221% more capital. Usually this isn't ideal, but given Edisun Power Europe conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Edisun Power Europe probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Edisun Power Europe have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these poor fundamentals, the stock has gained a huge 262% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing, we've spotted 1 warning sign facing Edisun Power Europe that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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