Returns On Capital At Neoen (EPA:NEOEN) Have Hit The Brakes

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Neoen (EPA:NEOEN), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Neoen, this is the formula:

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

0.063 = €386m ÷ (€7.0b - €889m) (Based on the trailing twelve months to June 2023).

So, Neoen has an ROCE of 6.3%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 7.6%.

Check out our latest analysis for Neoen

In the above chart we have measured Neoen's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Neoen here for free.

What Can We Tell From Neoen's ROCE Trend?

The returns on capital haven't changed much for Neoen in recent years. The company has employed 276% more capital in the last five years, and the returns on that capital have remained stable at 6.3%. 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 On Neoen's ROCE

As we've seen above, Neoen's returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 46% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Neoen does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is 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.