Terna - Rete Elettrica Nazionale Società per Azioni (BIT:TRN) Has Some Way To Go To Become A Multi-Bagger

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. 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)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Terna - Rete Elettrica Nazionale Società per Azioni:

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

0.081 = €1.1b ÷ (€18b - €4.2b) (Based on the trailing twelve months to March 2021).

So, Terna - Rete Elettrica Nazionale Società per Azioni has an ROCE of 8.1%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 7.0%.

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'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

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. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Terna - Rete Elettrica Nazionale Società per Azioni in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. On top of that you'll notice that Terna - Rete Elettrica Nazionale Società per Azioni has been paying out a large portion (82%) of earnings in the form of dividends to shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

The Bottom Line

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 64% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 1 warning sign for Terna - Rete Elettrica Nazionale Società per Azioni that we think you should be aware of.

While Terna - Rete Elettrica Nazionale Società per Azioni may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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