Energía Innovación y Desarrollo Fotovoltaico (BME:EIDF) Will Want To Turn Around Its Return Trends

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Energía Innovación y Desarrollo Fotovoltaico (BME:EIDF) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Energía Innovación y Desarrollo Fotovoltaico is:

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

0.14 = €12m ÷ (€161m - €77m) (Based on the trailing twelve months to December 2023).

Thus, Energía Innovación y Desarrollo Fotovoltaico has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electrical industry average of 12%.

View our latest analysis for Energía Innovación y Desarrollo Fotovoltaico

Historical performance is a great place to start when researching a stock so above you can see the gauge for Energía Innovación y Desarrollo Fotovoltaico's ROCE against it's prior returns. If you're interested in investigating Energía Innovación y Desarrollo Fotovoltaico's past further, check out this free graph covering Energía Innovación y Desarrollo Fotovoltaico's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 30% four years ago, while capital employed has grown 1,365%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Energía Innovación y Desarrollo Fotovoltaico probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

Another thing to note, Energía Innovación y Desarrollo Fotovoltaico has a high ratio of current liabilities to total assets of 48%. 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 Key Takeaway

We're a bit apprehensive about Energía Innovación y Desarrollo Fotovoltaico because despite more capital being deployed in the business, returns on that capital and sales have both fallen. We expect this has contributed to the stock plummeting 80% during the last year. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Energía Innovación y Desarrollo Fotovoltaico does have some risks, we noticed 4 warning signs (and 3 which are concerning) we think you should know about.

While Energía Innovación y Desarrollo Fotovoltaico 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.