Some Investors May Be Worried About Greenvolt - Energias Renováveis' (ELI:GVOLT) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after briefly looking over the numbers, we don't think Greenvolt - Energias Renováveis (ELI:GVOLT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.026 = €34m ÷ (€1.5b - €215m) (Based on the trailing twelve months to December 2022).

Therefore, Greenvolt - Energias Renováveis has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 6.8%.

View our latest analysis for Greenvolt - Energias Renováveis

Above you can see how the current ROCE for Greenvolt - Energias 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 Greenvolt - Energias Renováveis here for free.

What Can We Tell From Greenvolt - Energias Renováveis' ROCE Trend?

In terms of Greenvolt - Energias Renováveis' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 20% over the last four years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Greenvolt - Energias Renováveis has done well to pay down its current liabilities to 14% of total assets. Since the ratio used to be 72%, that's a significant reduction and it no doubt explains the drop in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On 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. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

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

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.