What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think Terna - Rete Elettrica Nazionale Società per Azioni (BIT:TRN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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)
0.075 = €1.1b ÷ (€20b - €4.7b) (Based on the trailing twelve months to June 2021).
Therefore, Terna - Rete Elettrica Nazionale Società per Azioni has an ROCE of 7.5%. On its own, that's a low figure but it's around the 6.8% average generated by the Electric Utilities industry.
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.
How Are Returns Trending?
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 31% more capital in the last five years, and the returns on that capital have remained stable at 7.5%. 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 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 75% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
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.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.