Romande Energie Holding (VTX:HREN) Has Some Difficulty Using Its Capital Effectively

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. So after glancing at the trends within Romande Energie Holding (VTX:HREN), we weren't too hopeful.

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

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 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%.

See 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Romande Energie Holding's ROCE Trending?

There is reason to be cautious about Romande Energie Holding, given the returns are trending downwards. About five years ago, returns on capital were 4.8%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Romande Energie Holding to turn into a multi-bagger.

In Conclusion...

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. However the stock has delivered a 47% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 2 warning signs for Romande Energie Holding you'll probably want to know about.

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