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. 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?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.084 = €1.2b ÷ (€20b - €5.6b) (Based on the trailing twelve months to September 2022).

Therefore, Terna - Rete Elettrica Nazionale Società per Azioni has an ROCE of 8.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.4%.

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 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

Over the past five years, Terna - Rete Elettrica Nazionale Società per Azioni's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Terna - Rete Elettrica Nazionale Società per Azioni to be a multi-bagger going forward. That being the case, it makes sense that Terna - Rete Elettrica Nazionale Società per Azioni has been paying out 76% of its earnings to its shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.

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 92% 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.

If you'd like to know more about Terna - Rete Elettrica Nazionale Società per Azioni, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.

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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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.