Returns On Capital Are Showing Encouraging Signs At Alerion Clean Power (BIT:ARN)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Alerion Clean Power (BIT:ARN) so let's look a bit deeper.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Alerion Clean Power, this is the formula:

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

0.054 = €43m ÷ (€892m - €94m) (Based on the trailing twelve months to June 2021).

Thus, Alerion Clean Power has an ROCE of 5.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.9%.

Check out our latest analysis for Alerion Clean Power

In the above chart we have measured Alerion Clean Power's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 5.4%. The amount of capital employed has increased too, by 167%. So we're very much inspired by what we're seeing at Alerion Clean Power thanks to its ability to profitably reinvest capital.

The Bottom Line

All in all, it's terrific to see that Alerion Clean Power is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 991% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Alerion Clean Power does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those can't be ignored...

While Alerion Clean Power 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.