REN - Redes Energéticas Nacionais SGPS (ELI:RENE) Hasn't Managed To Accelerate Its Returns

There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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 REN - Redes Energéticas Nacionais SGPS (ELI:RENE) 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)

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 REN - Redes Energéticas Nacionais SGPS, this is the formula:

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

0.061 = €244m ÷ (€6.3b - €2.3b) (Based on the trailing twelve months to September 2023).

So, REN - Redes Energéticas Nacionais SGPS has an ROCE of 6.1%. Even though it's in line with the industry average of 6.3%, it's still a low return by itself.

Check out our latest analysis for REN - Redes Energéticas Nacionais SGPS

In the above chart we have measured REN - Redes Energéticas Nacionais SGPS' 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.

So How Is REN - Redes Energéticas Nacionais SGPS' ROCE Trending?

Over the past five years, REN - Redes Energéticas Nacionais SGPS' ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at REN - Redes Energéticas Nacionais SGPS in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. That probably explains why REN - Redes Energéticas Nacionais SGPS has been paying out 94% of its earnings as dividends to shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 36% of total assets, this reported ROCE would probably be less than6.1% because total capital employed would be higher.The 6.1% ROCE could be even lower if current liabilities weren't 36% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

The Key Takeaway

In a nutshell, REN - Redes Energéticas Nacionais SGPS has been trudging along with the same returns from the same amount of capital over the last five years. Unsurprisingly, the stock has only gained 19% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing: We've identified 3 warning signs with REN - Redes Energéticas Nacionais SGPS (at least 2 which make us uncomfortable) , and understanding them 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.