Returns On Capital Signal Tricky Times Ahead For RENOVA (TSE:9519)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think RENOVA (TSE:9519) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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)

0.0049 = JP¥2.3b ÷ (JP¥522b - JP¥46b) (Based on the trailing twelve months to June 2024).

Thus, RENOVA has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 2.5%.

See 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.

The Trend Of ROCE

The trend of ROCE doesn't look fantastic because it's fallen from 6.2% five years ago, while the business's capital employed increased by 432%. Usually this isn't ideal, but given RENOVA conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with RENOVA's earnings and if they change as a result from the capital raise. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

The Bottom Line On RENOVA's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for RENOVA. In light of this, the stock has only gained 4.9% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One more thing: We've identified 4 warning signs with RENOVA (at least 2 which are significant) , and understanding these would certainly be useful.

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. 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.