REN - Redes Energéticas Nacionais SGPS' (ELI:RENE) Returns On Capital Not Reflecting Well On The Business

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within REN - Redes Energéticas Nacionais SGPS (ELI:RENE), we weren't too hopeful.

What Is 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)

0.047 = €205m ÷ (€5.6b - €1.2b) (Based on the trailing twelve months to September 2022).

Thus, REN - Redes Energéticas Nacionais SGPS has an ROCE of 4.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.0%.

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.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at REN - Redes Energéticas Nacionais SGPS. To be more specific, the ROCE was 6.5% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect REN - Redes Energéticas Nacionais SGPS to turn into a multi-bagger.

Our Take On REN - Redes Energéticas Nacionais SGPS' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 47% return. 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 final note, we've found 2 warning signs for REN - Redes Energéticas Nacionais SGPS that we think 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.

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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.