These Return Metrics Don't Make Romande Energie Holding (VTX:HREN) Look Too Strong

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Romande Energie Holding (VTX:HREN) we aren't filled with optimism, but let's investigate further.

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 7.2%.

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'd like to see what analysts are forecasting going forward, you should check out our free report for Romande Energie Holding.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Romande Energie Holding. Unfortunately the returns on capital have diminished from the 4.8% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 summary, it's unfortunate that Romande Energie Holding is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 36% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to know some of the risks facing Romande Energie Holding we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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