Romande Energie Holding (VTX:REHN) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Romande Energie Holding (VTX:REHN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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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)

0.0087 = CHF23m ÷ (CHF2.8b - CHF216m) (Based on the trailing twelve months to December 2024).

Thus, Romande Energie Holding has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 7.6%.

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're interested, you can view the analysts predictions in our free analyst report for Romande Energie Holding .

What Can We Tell From Romande Energie Holding's ROCE Trend?

In terms of Romande Energie Holding's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 3.2%, but since then they've fallen to 0.9%. However it looks like Romande Energie Holding might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that Romande Energie Holding is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 16% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Romande Energie Holding does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

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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.