What Do You Get For Owning EON SE (FRA:EOAN)?

This analysis is intended to introduce important early concepts to people who are starting to invest and looking to gauge the potential return on investment in EON SE (FRA:EOAN).

Buying E.ON makes you a partial owner of the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. Your return is tied to EOAN’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. To understand E.ON’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

Check out our latest analysis for E.ON

ROCE: Explanation and Calculation

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business' ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. To determine E.ON's capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). I have calculated E.ON’s ROCE for you below:

The calculation above shows that EOAN’s earnings were 16% of capital employed. A good ROCE hurdle you should aim for in your investments is 15%, which is exceeded by EOAN and means the company creates a solid amount of earnings on capital employed. If this can be sustained with good reinvestment opportunities or dividend distributions your capital has the potential to compound over time.

Does this mean I should invest?

The encouraging ROCE is good news for E.ON investors if the company is able to maintain strong earnings and control their capital needs. But if this doesn’t occur, EOAN's ROCE may deteriorate, in which case your money is better invested elsewhere. Therefore, investors need to be confident in the trend of the inputs in the formula above, so that E.ON will continue the solid returns. Three years ago, EOAN’s ROCE was 2.0%, which means the company's capital returns have improved. We can see that earnings have increased from €1.8b to €6.3b whilst the amount of capital employed fell as a result of a decreased level of total assets , which means the company has been able to improve ROCE by growing earnings and simultaneously putting less capital to work.

Next Steps

E.ON’s ROCE has increased in the recent past and is above a benchmark that makes the company a potentially attractive stock that can achieve a solid return on investment. This makes the company an attractive place to put your money, but ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation. If you don't pay attention to these factors you cannot be sure if this trend will continue or if you are getting a good deal for the future returns you are paying for. E.ON's fundamentals can be explored with the links I've provided below if you are interested, otherwise you can start looking at other high-performing stocks.

1. Future Outlook: What are well-informed industry analysts predicting for EOAN’s future growth? Take a look at our free research report of analyst consensus for EOAN’s outlook.
2. Valuation: What is EOAN worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether EOAN is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.