Investors Shouldn't Overlook Eneraqua Technologies' (LON:ETP) Impressive Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Eneraqua Technologies' (LON:ETP) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Eneraqua Technologies is:

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

0.34 = UK£10m ÷ (UK£48m - UK£18m) (Based on the trailing twelve months to January 2023).

Thus, Eneraqua Technologies has an ROCE of 34%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

See our latest analysis for Eneraqua Technologies

Above you can see how the current ROCE for Eneraqua Technologies 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 Eneraqua Technologies here for free.

So How Is Eneraqua Technologies' ROCE Trending?

The trends we've noticed at Eneraqua Technologies are quite reassuring. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 34%. The amount of capital employed has increased too, by 2,067%. So we're very much inspired by what we're seeing at Eneraqua Technologies thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 38%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From Eneraqua Technologies' ROCE

All in all, it's terrific to see that Eneraqua Technologies is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 66% in the last year, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we found 3 warning signs for Eneraqua Technologies (1 is concerning) you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.