Returns On Capital Are Showing Encouraging Signs At Swan Energy (NSE:SWANENERGY)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. 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 Swan Energy's (NSE:SWANENERGY) returns on capital, so let's have a look.

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. To calculate this metric for Swan Energy, this is the formula:

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

0.083 = ₹9.0b ÷ (₹122b - ₹13b) (Based on the trailing twelve months to June 2024).

Therefore, Swan Energy has an ROCE of 8.3%. Ultimately, that's a low return and it under-performs the Luxury industry average of 11%.

See our latest analysis for Swan Energy

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Swan Energy has performed in the past in other metrics, you can view this free graph of Swan Energy's past earnings, revenue and cash flow.

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

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.3%. 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 691%. 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.

On a related note, the company's ratio of current liabilities to total assets has decreased to 11%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Swan Energy's ROCE

To sum it up, Swan Energy has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 437% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing Swan Energy, we've discovered 1 warning sign 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. 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.