The Return Trends At Suzlon Energy (NSE:SUZLON) Look Promising

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So on that note, Suzlon Energy (NSE:SUZLON) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Suzlon Energy is:

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

0.19 = ₹6.9b ÷ (₹59b - ₹23b) (Based on the trailing twelve months to December 2023).

Therefore, Suzlon Energy has an ROCE of 19%. That's a relatively normal return on capital, and it's around the 18% generated by the Electrical industry.

View our latest analysis for Suzlon Energy

Above you can see how the current ROCE for Suzlon Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Suzlon Energy .

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Suzlon Energy. The numbers show that in the last three years, the returns generated on capital employed have grown considerably to 19%. 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 22%. So we're very much inspired by what we're seeing at Suzlon Energy thanks to its ability to profitably reinvest capital.

One more thing to note, Suzlon Energy has decreased current liabilities to 38% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On Suzlon Energy's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Suzlon Energy has. 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 Suzlon Energy can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 3 warning signs with Suzlon Energy and understanding them should be part of your investment process.

While Suzlon Energy 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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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.