Is Swan Energy (NSE:SWANENERGY) Likely To Turn Things Around?

Did you know there are some financial metrics that can provide clues of a potential 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Swan Energy (NSE:SWANENERGY), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Swan Energy:

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

0.018 = ₹303m ÷ (₹35b - ₹18b) (Based on the trailing twelve months to June 2020).

Therefore, Swan Energy has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Luxury industry average of 8.5%.

See our latest analysis for Swan Energy

Historical performance is a great place to start when researching a stock so above you can see the gauge for Swan Energy's ROCE against it's prior returns. If you're interested in investigating Swan Energy's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Swan Energy's ROCE Trend?

On the surface, the trend of ROCE at Swan Energy doesn't inspire confidence. To be more specific, ROCE has fallen from 2.3% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 52%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Swan Energy's ROCE

We're a bit apprehensive about Swan Energy because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 107% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel to comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know about the risks facing Swan Energy, we've discovered 2 warning signs that you should be aware of.

While Swan Energy 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. 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.
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