Returns On Capital At Grupo EcoenerU (BME:ENER) Have Stalled

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Although, when we looked at Grupo EcoenerU (BME:ENER), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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 Grupo EcoenerU is:

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

0.062 = €24m ÷ (€413m - €26m) (Based on the trailing twelve months to June 2022).

Thus, Grupo EcoenerU has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 8.2%.

Check out our latest analysis for Grupo EcoenerU

Above you can see how the current ROCE for Grupo EcoenerU compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

In terms of Grupo EcoenerU's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 6.2% for the last three years, and the capital employed within the business has risen 118% 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.

What We Can Learn From Grupo EcoenerU's ROCE

Long story short, while Grupo EcoenerU has been reinvesting its capital, the returns that it's generating haven't increased. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Grupo EcoenerU has the makings of a multi-bagger.

Like most companies, Grupo EcoenerU does come with some risks, and we've found 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.