REN - Redes Energéticas Nacionais SGPS (ELI:RENE) Is Finding It Tricky To Allocate Its Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within REN - Redes Energéticas Nacionais SGPS (ELI:RENE), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for REN - Redes Energéticas Nacionais SGPS:

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

0.043 = €195m ÷ (€5.6b - €1.0b) (Based on the trailing twelve months to December 2021).

So, REN - Redes Energéticas Nacionais SGPS has an ROCE of 4.3%. On its own, that's a low figure but it's around the 5.1% average generated by the Integrated Utilities industry.

View 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'd like, you can check out the forecasts from the analysts covering REN - Redes Energéticas Nacionais SGPS here for free.

The Trend Of ROCE

In terms of REN - Redes Energéticas Nacionais SGPS' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 6.1% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on REN - Redes Energéticas Nacionais SGPS becoming one if things continue as they have.

Our Take On REN - Redes Energéticas Nacionais SGPS' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these concerning fundamentals, the stock has performed strongly with a 53% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 2 warning signs for REN - Redes Energéticas Nacionais SGPS you'll probably want to know about.

While REN - Redes Energéticas Nacionais SGPS 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.