Returns At EnBW Energie Baden-Württemberg (ETR:EBK) Are On The Way Up

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at EnBW Energie Baden-Württemberg (ETR:EBK) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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 EnBW Energie Baden-Württemberg is:

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

0.087 = €4.0b ÷ (€65b - €18b) (Based on the trailing twelve months to December 2023).

So, EnBW Energie Baden-Württemberg has an ROCE of 8.7%. On its own that's a low return, but compared to the average of 7.2% generated by the Electric Utilities industry, it's much better.

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 EnBW Energie Baden-Württemberg's past earnings, revenue and cash flow.

What Can We Tell From EnBW Energie Baden-Württemberg's ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 8.7%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 64%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On EnBW Energie Baden-Württemberg's ROCE

To sum it up, EnBW Energie Baden-Württemberg has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we found 4 warning signs for EnBW Energie Baden-Württemberg (2 make us uncomfortable) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.