Here's What To Make Of Neoen's (EPA:NEOEN) Decelerating Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Neoen (EPA:NEOEN), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Neoen:

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

0.035 = €136m ÷ (€4.5b - €552m) (Based on the trailing twelve months to June 2021).

Therefore, Neoen has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 5.0%.

View our latest analysis for Neoen

Above you can see how the current ROCE for Neoen compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Neoen here for free.

What The Trend Of ROCE Can Tell Us

In terms of Neoen's historical ROCE trend, it doesn't exactly demand attention. The company has employed 436% more capital in the last five years, and the returns on that capital have remained stable at 3.5%. 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.

The Bottom Line

In summary, Neoen has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has declined 18% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Neoen has the makings of a multi-bagger.

On a final note, we found 2 warning signs for Neoen (1 can't be ignored) you should be aware of.

While Neoen isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

If you’re looking to trade Neoen, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.