Is Romande Energie Holding (VTX:HREN) Using Capital Effectively?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Romande Energie Holding (VTX:HREN), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Romande Energie Holding is:

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

0.029 = CHF61m ÷ (CHF2.3b - CHF197m) (Based on the trailing twelve months to June 2020).

So, Romande Energie Holding has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 6.6%.

Check out our latest analysis for Romande Energie Holding

In the above chart we have measured Romande Energie Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Romande Energie Holding here for free.

The Trend Of ROCE

There is reason to be cautious about Romande Energie Holding, given the returns are trending downwards. To be more specific, the ROCE was 4.8% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Romande Energie Holding becoming one if things continue as they have.

What We Can Learn From Romande Energie Holding's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 41% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Romande Energie Holding does have some risks though, and we've spotted 2 warning signs for Romande Energie Holding that you might be interested in.

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

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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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