Returns On Capital Signal Tricky Times Ahead For TERNA ENERGY Industrial Commercial Technical Societe Anonyme (ATH:TENERGY)

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. 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. In light of that, when we looked at TERNA ENERGY Industrial Commercial Technical Societe Anonyme (ATH:TENERGY) and its ROCE trend, we weren't exactly thrilled.

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 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)

0.045 = €79m ÷ (€2.1b - €326m) (Based on the trailing twelve months to September 2023).

Therefore, TERNA ENERGY Industrial Commercial Technical Societe Anonyme has an ROCE of 4.5%. In absolute terms, that's a low return and it also 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'd like, you can check out the forecasts from the analysts covering TERNA ENERGY Industrial Commercial Technical Societe Anonyme here for free.

What Can We Tell From TERNA ENERGY Industrial Commercial Technical Societe Anonyme's ROCE Trend?

On the surface, the trend of ROCE at TERNA ENERGY Industrial Commercial Technical Societe Anonyme doesn't inspire confidence. Around five years ago the returns on capital were 9.3%, but since then they've fallen to 4.5%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for TERNA ENERGY Industrial Commercial Technical Societe Anonyme have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these poor fundamentals, the stock has gained a huge 235% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about TERNA ENERGY Industrial Commercial Technical Societe Anonyme, we've spotted 3 warning signs, and 2 of them are a bit concerning.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.