Be Wary Of TERNA ENERGY Industrial Commercial Technical Societe Anonyme (ATH:TENERGY) And Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. However, after briefly looking over the numbers, we don't think TERNA ENERGY Industrial Commercial Technical Societe Anonyme (ATH:TENERGY) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for TERNA ENERGY Industrial Commercial Technical Societe Anonyme, this is the formula:

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

0.034 = €59m ÷ (€2.0b - €308m) (Based on the trailing twelve months to March 2023).

Thus, TERNA ENERGY Industrial Commercial Technical Societe Anonyme has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 7.7%.

View our latest analysis for TERNA ENERGY Industrial Commercial Technical Societe Anonyme

In the above chart we have measured TERNA ENERGY Industrial Commercial Technical Societe Anonyme's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For TERNA ENERGY Industrial Commercial Technical Societe Anonyme Tell Us?

In terms of TERNA ENERGY Industrial Commercial Technical Societe Anonyme's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 8.9%, but since then they've fallen to 3.4%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that TERNA ENERGY Industrial Commercial Technical Societe Anonyme is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 176% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know more about TERNA ENERGY Industrial Commercial Technical Societe Anonyme, we've spotted 5 warning signs, and 2 of them are a bit unpleasant.

While TERNA ENERGY Industrial Commercial Technical Societe Anonyme 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.