Investors Met With Slowing Returns on Capital At Falck Renewables (BIT:FKR)

By
Simply Wall St
Published
September 10, 2021
BIT:FKR
Source: Shutterstock

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Having said that, from a first glance at Falck Renewables (BIT:FKR) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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. Analysts use this formula to calculate it for Falck Renewables:

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

0.053 = €95m ÷ (€2.0b - €253m) (Based on the trailing twelve months to June 2021).

Thus, Falck Renewables has an ROCE of 5.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.0%.

Check out our latest analysis for Falck Renewables

roce
BIT:FKR Return on Capital Employed September 11th 2021

In the above chart we have measured Falck Renewables' 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 Falck Renewables here for free.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Falck Renewables in recent years. Over the past five years, ROCE has remained relatively flat at around 5.3% and the business has deployed 42% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Falck Renewables' ROCE

In summary, Falck Renewables has simply been reinvesting capital and generating the same low rate of return as before. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 957% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 1 warning sign facing Falck Renewables that you might find interesting.

While Falck Renewables 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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