What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. However, after investigating REN - Redes Energéticas Nacionais SGPS (ELI:RENE), we don't think it's current trends fit the mold of a multi-bagger.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)
0.046 = €198m ÷ (€5.3b - €992m) (Based on the trailing twelve months to March 2021).
Thus, REN - Redes Energéticas Nacionais SGPS has an ROCE of 4.6%. Even though it's in line with the industry average of 5.1%, it's still a low return by itself.
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.
What Can We Tell From REN - Redes Energéticas Nacionais SGPS' ROCE Trend?
On the surface, the trend of ROCE at REN - Redes Energéticas Nacionais SGPS doesn't inspire confidence. Around five years ago the returns on capital were 6.8%, but since then they've fallen to 4.6%. 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.
Our Take On REN - Redes Energéticas Nacionais SGPS' ROCE
To conclude, we've found that REN - Redes Energéticas Nacionais SGPS is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 29% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you'd like to know about the risks facing REN - Redes Energéticas Nacionais SGPS, we've discovered 2 warning signs that you should be aware of.
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.
If you're looking for stocks to buy, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account.
This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.