Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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.
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)
0.087 = €1.2b ÷ (€15b - €2.0b) (Based on the trailing twelve months to September 2020).
Therefore, Terna - Rete Elettrica Nazionale Società per Azioni has an ROCE of 8.7%. On its own that's a low return, but compared to the average of 7.0% generated by the Electric Utilities industry, it's much better.
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, you can check out the forecasts from the analysts covering Terna - Rete Elettrica Nazionale Società per Azioni here for free.
How Are Returns Trending?
Over the past five years, Terna - Rete Elettrica Nazionale Società per Azioni's ROCE and capital employed have both remained mostly flat. 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. On top of that you'll notice that Terna - Rete Elettrica Nazionale Società per Azioni has been paying out a large portion (77%) of earnings in the form of dividends to 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.
Our Take On Terna - Rete Elettrica Nazionale Società per Azioni's ROCE
In summary, Terna - Rete Elettrica Nazionale Società per Azioni isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 66% 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.
One final note, you should learn about the 2 warning signs we've spotted with Terna - Rete Elettrica Nazionale Società per Azioni (including 1 which is can't be ignored) .
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. 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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