Investors Met With Slowing Returns on Capital At Corporación Acciona Energías Renovables (BME:ANE)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Corporación Acciona Energías Renovables (BME:ANE) 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)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Corporación Acciona Energías Renovables is:

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

0.067 = €838m ÷ (€15b - €2.2b) (Based on the trailing twelve months to December 2023).

So, Corporación Acciona Energías Renovables has an ROCE of 6.7%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 9.3%.

View our latest analysis for Corporación Acciona Energías Renovables

In the above chart we have measured Corporación Acciona Energías Renovables' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Corporación Acciona Energías Renovables .

What Does the ROCE Trend For Corporación Acciona Energías Renovables Tell Us?

In terms of Corporación Acciona Energías Renovables' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 6.7% for the last five years, and the capital employed within the business has risen 107% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Corporación Acciona Energías Renovables has done well to reduce current liabilities to 15% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On Corporación Acciona Energías Renovables' ROCE

As we've seen above, Corporación Acciona Energías Renovables' returns on capital haven't increased but it is reinvesting in the business. And in the last year, the stock has given away 40% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Corporación Acciona Energías Renovables does come with some risks though, we found 5 warning signs in our investment analysis, and 3 of those are a bit concerning...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.