The Returns On Capital At EnBW Energie Baden-Württemberg (ETR:EBK) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 EnBW Energie Baden-Württemberg (ETR:EBK) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for EnBW Energie Baden-Württemberg, this is the formula:

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

0.034 = €1.4b ÷ (€70b - €29b) (Based on the trailing twelve months to December 2022).

Therefore, EnBW Energie Baden-Württemberg has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 8.8%.

View our latest analysis for EnBW Energie Baden-Württemberg

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're interested in investigating EnBW Energie Baden-Württemberg's past further, check out this free graph of past earnings, revenue and cash flow.

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

In terms of EnBW Energie Baden-Württemberg's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.6%, but since then they've fallen to 3.4%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 41%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 3.4%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On EnBW Energie Baden-Württemberg's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that EnBW Energie Baden-Württemberg is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 200% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

EnBW Energie Baden-Württemberg does have some risks, we noticed 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.

While EnBW Energie Baden-Württemberg 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.