Can E4U (SEP:EFORU) Continue To Grow Its Returns On Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, E4U (SEP:EFORU) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for E4U:

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

0.19 = Kč59m ÷ (Kč356m - Kč46m) (Based on the trailing twelve months to June 2020).

Thus, E4U has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Renewable Energy industry average of 6.1% it's much better.

Check out our latest analysis for E4U

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of E4U, check out these free graphs here.

How Are Returns Trending?

E4U is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 47% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Key Takeaway

To sum it up, E4U is collecting higher returns from the same amount of capital, and that's impressive. Considering the stock has delivered 21% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

E4U does have some risks though, and we've spotted 2 warning signs for E4U that you might be interested in.

While E4U may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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