Energía Innovación y Desarrollo Fotovoltaico (BME:EIDF) Could Be Struggling To Allocate Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. So when we looked at Energía Innovación y Desarrollo Fotovoltaico (BME:EIDF), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Energía Innovación y Desarrollo Fotovoltaico:

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

0.20 = €8.8m ÷ (€76m - €32m) (Based on the trailing twelve months to December 2021).

Therefore, Energía Innovación y Desarrollo Fotovoltaico has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Electrical industry average of 12%.

Check out the opportunities and risks within the ES Electrical industry.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Energía Innovación y Desarrollo Fotovoltaico has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Energía Innovación y Desarrollo Fotovoltaico's ROCE Trend?

In terms of Energía Innovación y Desarrollo Fotovoltaico's historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 30%, but they have dropped over the last two years. 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.

On a side note, Energía Innovación y Desarrollo Fotovoltaico has done well to pay down its current liabilities to 41% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On Energía Innovación y Desarrollo Fotovoltaico's ROCE

While returns have fallen for Energía Innovación y Desarrollo Fotovoltaico in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 335% return over the last year, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Like most companies, Energía Innovación y Desarrollo Fotovoltaico does come with some risks, and we've found 1 warning sign that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.