What Do The Returns On Capital At Terna Energy Societe Anonyme Commercial Technical (ATH:TENERGY) Tell Us?

There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after briefly looking over the numbers, we don't think Terna Energy Societe Anonyme Commercial Technical (ATH:TENERGY) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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. 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)

0.065 = €126m ÷ (€2.0b - €45m) (Based on the trailing twelve months to September 2020).

Thus, Terna Energy Societe Anonyme Commercial Technical has an ROCE of 6.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.2%.

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

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?

The returns on capital haven't changed much for Terna Energy Societe Anonyme Commercial Technical in recent years. Over the past five years, ROCE has remained relatively flat at around 6.5% and the business has deployed 98% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 2.2% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

Long story short, while Terna Energy Societe Anonyme Commercial Technical has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 767% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we found 4 warning signs for Terna Energy Societe Anonyme Commercial Technical (1 is a bit concerning) you should be aware of.

While Terna Energy Societe Anonyme Commercial Technical isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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