Returns On Capital Are Showing Encouraging Signs At Terna Energy Societe Anonyme Commercial Technical (ATH:TENERGY)

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Terna Energy Societe Anonyme Commercial Technical's (ATH:TENERGY) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Terna Energy Societe Anonyme Commercial Technical:

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

0.082 = €121m ÷ (€1.8b - €302m) (Based on the trailing twelve months to December 2021).

Therefore, Terna Energy Societe Anonyme Commercial Technical has an ROCE of 8.2%. On its own that's a low return, but compared to the average of 6.7% generated by the Renewable Energy industry, it's much better.

Check out our latest analysis for Terna Energy Societe Anonyme Commercial Technical

In the above chart we have measured Terna Energy Societe Anonyme Commercial Technical'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 report for Terna Energy Societe Anonyme Commercial Technical.

The Trend Of ROCE

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.2%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 27%. So we're very much inspired by what we're seeing at Terna Energy Societe Anonyme Commercial Technical thanks to its ability to profitably reinvest capital.

In Conclusion...

In summary, it's great to see that Terna Energy Societe Anonyme Commercial Technical 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. Since the stock has returned a staggering 447% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Terna Energy Societe Anonyme Commercial Technical does have some risks though, and we've spotted 1 warning sign for Terna Energy Societe Anonyme Commercial Technical that you might be interested in.

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.