Encavis (ETR:ECV) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Encavis (ETR:ECV) looks quite promising in regards to its trends of return on capital.

What Is 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. Analysts use this formula to calculate it for Encavis:

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

0.046 = €140m ÷ (€3.4b - €319m) (Based on the trailing twelve months to September 2022).

So, Encavis has an ROCE of 4.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.6%.

Check out the opportunities and risks within the DE Renewable Energy industry.

Above you can see how the current ROCE for Encavis compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Encavis.

The Trend Of ROCE

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 4.6%. 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 32%. So we're very much inspired by what we're seeing at Encavis thanks to its ability to profitably reinvest capital.

The Bottom Line

All in all, it's terrific to see that Encavis is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last three years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Encavis can keep these trends up, it could have a bright future ahead.

If you want to know some of the risks facing Encavis we've found 3 warning signs (1 is concerning!) that you should be aware of before investing here.

While Encavis 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.