Returns On Capital Signal Difficult Times Ahead For REN - Redes Energéticas Nacionais SGPS (ELI:RENE)

What financial metrics can indicate to us that a company is maturing or even in decline? 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 indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into REN - Redes Energéticas Nacionais SGPS (ELI:RENE), the trends above didn't look too great.

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)

0.042 = €194m ÷ (€5.5b - €944m) (Based on the trailing twelve months to September 2021).

So, REN - Redes Energéticas Nacionais SGPS has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Integrated Utilities industry average of 5.9%.

See 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 to see what analysts are forecasting going forward, you should check out our free report for REN - Redes Energéticas Nacionais SGPS.

What Can We Tell From REN - Redes Energéticas Nacionais SGPS' ROCE Trend?

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 6.3% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect REN - Redes Energéticas Nacionais SGPS to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that REN - Redes Energéticas Nacionais SGPS is generating lower returns from the same amount of capital. However the stock has delivered a 43% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

REN - Redes Energéticas Nacionais SGPS does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.