Audax Renovables' (BME:ADX) Returns On Capital Not Reflecting Well On The Business

Simply Wall St
February 19, 2022
Source: Shutterstock

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%.

Check out our latest analysis for Audax Renovables

BME:ADX Return on Capital Employed February 19th 2022

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.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.