Here's What's Concerning About Greenvolt - Energias Renováveis' (ELI:GVOLT) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Greenvolt - Energias Renováveis (ELI:GVOLT), we don't think it's current trends fit the mold of a multi-bagger.

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 Greenvolt - Energias Renováveis, this is the formula:

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

0.04 = €48m ÷ (€1.3b - €132m) (Based on the trailing twelve months to September 2022).

So, Greenvolt - Energias Renováveis has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 6.0%.

Check out our latest analysis for Greenvolt - Energias Renováveis

In the above chart we have measured Greenvolt - Energias Renováveis' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

When we looked at the ROCE trend at Greenvolt - Energias Renováveis, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last three years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Greenvolt - Energias Renováveis has done well to pay down its current liabilities to 9.8% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Greenvolt - Energias Renováveis' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Greenvolt - Energias Renováveis is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 25% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Greenvolt - Energias Renováveis does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

While Greenvolt - Energias 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.