If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Audax Renovables (BME:ADX) and its ROCE trend, we weren't exactly thrilled.
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 Audax Renovables is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.033 = €26m ÷ (€1.3b - €479m) (Based on the trailing twelve months to June 2021).
Therefore, Audax Renovables has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 4.5%.
Above you can see how the current ROCE for Audax Renovables compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Audax Renovables.
What Can We Tell From Audax Renovables' ROCE Trend?
Unfortunately, the trend isn't great with ROCE falling from 17% five years ago, while capital employed has grown 786%. 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. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Audax Renovables' earnings and if they change as a result from the capital raise.
Our Take On Audax Renovables' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Audax Renovables is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 52% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
One final note, you should learn about the 5 warning signs we've spotted with Audax Renovables (including 2 which can't be ignored) .
While Audax Renovables may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.