What Do The Returns At Alerion Clean Power (BIT:ARN) Mean Going Forward?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So on that note, Alerion Clean Power (BIT:ARN) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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)

0.042 = €35m ÷ (€944m - €121m) (Based on the trailing twelve months to December 2020).

Therefore, Alerion Clean Power has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 5.5%.

See 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'd like, you can check out the forecasts from the analysts covering Alerion Clean Power here for free.

What Does the ROCE Trend For Alerion Clean Power Tell Us?

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 data shows that returns on capital have increased substantially over the last five years to 4.2%. 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 203%. So we're very much inspired by what we're seeing at Alerion Clean Power thanks to its ability to profitably reinvest capital.

One more thing to note, Alerion Clean Power has decreased current liabilities to 13% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

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. And a remarkable 534% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to know some of the risks facing Alerion Clean Power we've found 4 warning signs (1 is significant!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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