Returns On Capital At EDP Renováveis (ELI:EDPR) Paint A Concerning Picture

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at EDP Renováveis (ELI:EDPR) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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)

0.011 = €289m ÷ (€31b - €5.1b) (Based on the trailing twelve months to June 2024).

Therefore, EDP Renováveis has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 5.7%.

See 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 The Trend Of ROCE Can Tell Us

In terms of EDP Renováveis' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 3.3% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by EDP Renováveis' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 65% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Like most companies, EDP Renováveis does come with some risks, and we've found 2 warning signs that you should be aware of.

While EDP Renováveis 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.