GreenEnergy (TSE:1436) Is Experiencing Growth In Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Speaking of which, we noticed some great changes in GreenEnergy's (TSE:1436) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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 GreenEnergy is:

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

0.057 = JP¥513m ÷ (JP¥12b - JP¥3.2b) (Based on the trailing twelve months to April 2024).

So, GreenEnergy has an ROCE of 5.7%. In absolute terms, that's a low return, but it's much better than the Renewable Energy industry average of 2.9%.

Check out our latest analysis for GreenEnergy

Historical performance is a great place to start when researching a stock so above you can see the gauge for GreenEnergy's ROCE against it's prior returns. If you're interested in investigating GreenEnergy's past further, check out this free graph covering GreenEnergy's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last three years, returns on capital employed have risen substantially to 5.7%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 56%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From GreenEnergy's ROCE

All in all, it's terrific to see that GreenEnergy is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 344% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if GreenEnergy can keep these trends up, it could have a bright future ahead.

If you want to know some of the risks facing GreenEnergy we've found 3 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

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