Societatea Energetica Electrica (BVB:EL) Could Be At Risk Of Shrinking As A Company

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Societatea Energetica Electrica (BVB:EL), we weren't too hopeful.

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 Societatea Energetica Electrica, this is the formula:

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

0.0094 = RON61m ÷ (RON7.9b - RON1.5b) (Based on the trailing twelve months to September 2021).

Thus, Societatea Energetica Electrica has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 7.2%.

See our latest analysis for Societatea Energetica Electrica

In the above chart we have measured Societatea Energetica Electrica's 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

In terms of Societatea Energetica Electrica's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 9.2%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Societatea Energetica Electrica becoming one if things continue as they have.

What We Can Learn From Societatea Energetica Electrica's ROCE

In summary, it's unfortunate that Societatea Energetica Electrica is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 15% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we've found 3 warning signs for Societatea Energetica Electrica that we think you should be aware of.

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.