Here's What's Concerning About RENOVA's (TSE:9519) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating RENOVA (TSE:9519), we don't think it's current trends fit the mold of a multi-bagger.

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What Is 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. To calculate this metric for RENOVA, this is the formula:

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

0.0014 = JP¥634m ÷ (JP¥494b - JP¥36b) (Based on the trailing twelve months to December 2024).

Thus, RENOVA has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 6.1%.

Check out our latest analysis for RENOVA

Above you can see how the current ROCE for RENOVA compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering RENOVA for free.

How Are Returns Trending?

We weren't thrilled with the trend because RENOVA's ROCE has reduced by 97% over the last five years, while the business employed 285% more capital. That being said, RENOVA raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. RENOVA probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line On RENOVA's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that RENOVA is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 35% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 5 warning signs we've spotted with RENOVA (including 2 which shouldn't be ignored) .

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.