The Returns At MVV Energie (ETR:MVV1) Aren't Growing

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

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. To calculate this metric for MVV Energie, this is the formula:

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

0.069 = €376m ÷ (€21b - €15b) (Based on the trailing twelve months to March 2022).

So, MVV Energie has an ROCE of 6.9%. In absolute terms, that's a low return, but it's much better than the Integrated Utilities industry average of 5.2%.

Check out 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.

What Can We Tell From MVV Energie's ROCE Trend?

In terms of MVV Energie's historical ROCE trend, it doesn't exactly demand attention. The company has employed 58% more capital in the last five years, and the returns on that capital have remained stable at 6.9%. 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.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 74% of total assets, this reported ROCE would probably be less than6.9% because total capital employed would be higher.The 6.9% ROCE could be even lower if current liabilities weren't 74% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

The Key Takeaway

In conclusion, MVV Energie has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 62% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing: We've identified 4 warning signs with MVV Energie (at least 1 which is potentially serious) , and understanding these would certainly be useful.

While MVV Energie 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. 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.