Here's What To Make Of Terna - Rete Elettrica Nazionale Società per Azioni's (BIT:TRN) Decelerating Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Terna - Rete Elettrica Nazionale Società per Azioni (BIT:TRN) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Terna - Rete Elettrica Nazionale Società per Azioni is:

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

0.08 = €1.2b ÷ (€22b - €7.6b) (Based on the trailing twelve months to December 2021).

So, Terna - Rete Elettrica Nazionale Società per Azioni has an ROCE of 8.0%. On its own, that's a low figure but it's around the 7.4% average generated by the Electric Utilities industry.

Check out our latest analysis for Terna - Rete Elettrica Nazionale Società per Azioni

In the above chart we have measured Terna - Rete Elettrica Nazionale Società per Azioni's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Terna - Rete Elettrica Nazionale Società per Azioni.

What The Trend Of ROCE Can Tell Us

Things have been pretty stable at Terna - Rete Elettrica Nazionale Società per Azioni, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Terna - Rete Elettrica Nazionale Società per Azioni doesn't end up being a multi-bagger in a few years time. That being the case, it makes sense that Terna - Rete Elettrica Nazionale Società per Azioni has been paying out 79% of its earnings to its shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 34% of total assets, this reported ROCE would probably be less than8.0% because total capital employed would be higher.The 8.0% ROCE could be even lower if current liabilities weren't 34% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

What We Can Learn From Terna - Rete Elettrica Nazionale Società per Azioni's ROCE

In a nutshell, Terna - Rete Elettrica Nazionale Società per Azioni has been trudging along with the same returns from the same amount of capital over the last five years. Although the market must be expecting these trends to improve because the stock has gained 93% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Terna - Rete Elettrica Nazionale Società per Azioni does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.