RENOVA (TSE:9519) Will Want To Turn Around Its Return Trends

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at RENOVA (TSE:9519) 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 RENOVA, this is the formula:

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

0.0091 = JP¥3.1b ÷ (JP¥385b - JP¥40b) (Based on the trailing twelve months to December 2023).

Thus, RENOVA has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 3.4%.

Check out our latest analysis for RENOVA

In the above chart we have measured RENOVA'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 RENOVA for free.

What Does the ROCE Trend For RENOVA Tell Us?

On the surface, the trend of ROCE at RENOVA doesn't inspire confidence. Around five years ago the returns on capital were 4.9%, but since then they've fallen to 0.9%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

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. In light of this, the stock has only gained 28% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One final note, you should learn about the 4 warning signs we've spotted with RENOVA (including 2 which are potentially serious) .

While RENOVA may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.