We Like These Underlying Return On Capital Trends At Terna Energy Societe Anonyme Commercial Technical (ATH:TENERGY)

What are the early trends we should look for to identify a stock that could 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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.

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. The formula for this calculation on Terna Energy Societe Anonyme Commercial Technical is:

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

0.084 = €133m ÷ (€2.0b - €378m) (Based on the trailing twelve months to June 2022).

Thus, Terna Energy Societe Anonyme Commercial Technical has an ROCE of 8.4%. In absolute terms, that's a low return, but it's much better than the Renewable Energy industry average of 6.1%.

Check out the opportunities and risks within the XX Renewable Energy industry.

Above you can see how the current ROCE for Terna Energy Societe Anonyme Commercial Technical 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 Terna Energy Societe Anonyme Commercial Technical here for free.

So How Is Terna Energy Societe Anonyme Commercial Technical's ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.4%. The amount of capital employed has increased too, by 37%. 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.

The Bottom Line On Terna Energy Societe Anonyme Commercial Technical's ROCE

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. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Terna Energy Societe Anonyme Commercial Technical can keep these trends up, it could have a bright future ahead.

Terna Energy Societe Anonyme Commercial Technical does have some risks though, and we've spotted 2 warning signs for Terna Energy Societe Anonyme Commercial Technical that you might be interested in.

While Terna Energy Societe Anonyme Commercial Technical 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.