Here's What's Concerning About EDP Renováveis' (ELI:EDPR) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating EDP Renováveis (ELI:EDPR), we don't think it's current trends fit the mold of a multi-bagger.

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Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for EDP Renováveis, this is the formula:

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

0.0029 = €77m ÷ (€32b - €4.6b) (Based on the trailing twelve months to December 2024).

Thus, EDP Renováveis has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 6.4%.

Check out our latest analysis for EDP Renováveis

Above you can see how the current ROCE for EDP Renováveis 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 EDP Renováveis for free.

What Can We Tell From EDP Renováveis' ROCE Trend?

In terms of EDP Renováveis' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.3% from 3.9% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On EDP Renováveis' ROCE

In summary, EDP Renováveis is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 28% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with EDP Renováveis (including 1 which is a bit unpleasant) .

While EDP Renováveis isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.