Naturgy Energy Group (BME:NTGY) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Naturgy Energy Group (BME:NTGY) so let's look a bit deeper.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Naturgy Energy Group is:

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

0.12 = €3.8b ÷ (€38b - €6.7b) (Based on the trailing twelve months to June 2024).

Therefore, Naturgy Energy Group has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 5.6% generated by the Gas Utilities industry.

View our latest analysis for Naturgy Energy Group

Above you can see how the current ROCE for Naturgy Energy Group 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 analyst report for Naturgy Energy Group .

The Trend Of ROCE

Naturgy Energy Group is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 69% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

What We Can Learn From Naturgy Energy Group's ROCE

To sum it up, Naturgy Energy Group is collecting higher returns from the same amount of capital, and that's impressive. Considering the stock has delivered 20% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

If you want to know some of the risks facing Naturgy Energy Group we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.

While Naturgy Energy Group 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.