EnBW Energie Baden-Württemberg (ETR:EBK) Hasn't Managed To Accelerate Its Returns

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating EnBW Energie Baden-Württemberg (ETR:EBK), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on EnBW Energie Baden-Württemberg is:

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

0.034 = €1.2b ÷ (€47b - €11b) (Based on the trailing twelve months to March 2021).

So, EnBW Energie Baden-Württemberg has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 7.1%.

Check out our latest analysis for EnBW Energie Baden-Württemberg

Historical performance is a great place to start when researching a stock so above you can see the gauge for EnBW Energie Baden-Württemberg's ROCE against it's prior returns. If you'd like to look at how EnBW Energie Baden-Württemberg has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is EnBW Energie Baden-Württemberg's ROCE Trending?

The returns on capital haven't changed much for EnBW Energie Baden-Württemberg in recent years. The company has employed 22% more capital in the last five years, and the returns on that capital have remained stable at 3.4%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On EnBW Energie Baden-Württemberg's ROCE

Long story short, while EnBW Energie Baden-Württemberg has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 311% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 2 warning signs facing EnBW Energie Baden-Württemberg that you might find interesting.

While EnBW Energie Baden-Württemberg 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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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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