Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, we've noticed some promising trends at Voltalia (EPA:VLTSA) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Voltalia, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.045 = €136m ÷ (€3.9b - €920m) (Based on the trailing twelve months to June 2024).
So, Voltalia has an ROCE of 4.5%. In absolute terms, that's a low return, but it's much better than the Renewable Energy industry average of 3.0%.
Check out our latest analysis for Voltalia
In the above chart we have measured Voltalia's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Voltalia .
How Are Returns Trending?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 4.5%. The amount of capital employed has increased too, by 241%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
What We Can Learn From Voltalia's ROCE
In summary, it's great to see that Voltalia can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And since the stock has fallen 21% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
Voltalia does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
While Voltalia 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.
About ENXTPA:VLTSA
Voltalia
Engages in the production of electricity from renewable energy sources.
Acceptable track record with limited growth.
