RWE's (ETR:RWE) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at RWE (ETR:RWE) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on RWE is:

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

0.019 = €1.3b ÷ (€109b - €39b) (Based on the trailing twelve months to September 2023).

Thus, RWE has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 5.7%.

Check out our latest analysis for RWE

Above you can see how the current ROCE for RWE compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering RWE here for free.

What Does the ROCE Trend For RWE Tell Us?

RWE has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 1.9% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, RWE is utilizing 103% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 36%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Key Takeaway

In summary, it's great to see that RWE has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five 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 RWE can keep these trends up, it could have a bright future ahead.

On a final note, we found 4 warning signs for RWE (2 shouldn't be ignored) you should be aware of.

While RWE 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.