Return Trends At Terna - Rete Elettrica Nazionale Società per Azioni (BIT:TRN) Aren't Appealing

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Terna - Rete Elettrica Nazionale Società per Azioni (BIT:TRN), it didn't seem to tick all of these boxes.

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 Terna - Rete Elettrica Nazionale Società per Azioni, this is the formula:

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

0.081 = €1.1b ÷ (€19b - €5.0b) (Based on the trailing twelve months to September 2021).

Thus, Terna - Rete Elettrica Nazionale Società per Azioni has an ROCE of 8.1%. On its own, that's a low figure but it's around the 7.2% average generated by the Electric Utilities industry.

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

Above you can see how the current ROCE for Terna - Rete Elettrica Nazionale Società per Azioni compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Terna - Rete Elettrica Nazionale Società per Azioni here for free.

What Does the ROCE Trend For Terna - Rete Elettrica Nazionale Società per Azioni Tell Us?

There are better returns on capital out there than what we're seeing at Terna - Rete Elettrica Nazionale Società per Azioni. The company has employed 22% more capital in the last five years, and the returns on that capital have remained stable at 8.1%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Terna - Rete Elettrica Nazionale Società per Azioni's ROCE

In conclusion, Terna - Rete Elettrica Nazionale Società per Azioni has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 99% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Like most companies, Terna - Rete Elettrica Nazionale Società per Azioni does come with some risks, and we've found 1 warning sign that you should be aware of.

While Terna - Rete Elettrica Nazionale Società per Azioni 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.