MVV Energie (ETR:MVV1) Will Want To Turn Around Its Return Trends

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think MVV Energie (ETR:MVV1) 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. Analysts use this formula to calculate it for MVV Energie:

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

0.062 = €276m ÷ (€17b - €12b) (Based on the trailing twelve months to December 2021).

Thus, MVV Energie has an ROCE of 6.2%. In absolute terms, that's a low return, but it's much better than the Integrated Utilities industry average of 3.6%.

See our latest analysis for MVV Energie

Historical performance is a great place to start when researching a stock so above you can see the gauge for MVV Energie's ROCE against it's prior returns. If you're interested in investigating MVV Energie's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of MVV Energie's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.2% from 8.5% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 74%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 6.2%. 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.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for MVV Energie. Furthermore the stock has climbed 87% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

One final note, you should learn about the 4 warning signs we've spotted with MVV Energie (including 1 which is potentially serious) .

While MVV Energie 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.