Energía Innovación y Desarrollo Fotovoltaico (BME:EIDF) Is Investing Its Capital With Increasing Efficiency

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Energía Innovación y Desarrollo Fotovoltaico's (BME:EIDF) returns on capital, so let's have a look.

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)

0.36 = €38m ÷ (€222m - €116m) (Based on the trailing twelve months to June 2022).

Therefore, Energía Innovación y Desarrollo Fotovoltaico has an ROCE of 36%. That's a fantastic return and not only that, it outpaces the average of 6.9% earned by companies in a similar industry.

View our latest analysis for Energía Innovación y Desarrollo Fotovoltaico

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 The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Energía Innovación y Desarrollo Fotovoltaico. Over the last two years, returns on capital employed have risen substantially to 36%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 1,362%. So we're very much inspired by what we're seeing at Energía Innovación y Desarrollo Fotovoltaico thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Energía Innovación y Desarrollo Fotovoltaico has a current liabilities to total assets ratio of 52%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In summary, it's great to see that Energía Innovación y Desarrollo Fotovoltaico can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Astute investors may have an opportunity here because the stock has declined 56% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to know some of the risks facing Energía Innovación y Desarrollo Fotovoltaico we've found 4 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

Energía Innovación y Desarrollo Fotovoltaico is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.