Societatea Energetica Electrica (BVB:EL) Has Some Difficulty Using Its Capital Effectively

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Societatea Energetica Electrica (BVB:EL), we weren't too upbeat about how things were going.

What is Return On Capital Employed (ROCE)?

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. 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)

0.061 = RON407m ÷ (RON8.2b - RON1.5b) (Based on the trailing twelve months to March 2021).

Therefore, Societatea Energetica Electrica has an ROCE of 6.1%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 7.2%.

View our latest analysis for Societatea Energetica Electrica

Above you can see how the current ROCE for Societatea Energetica Electrica compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Societatea Energetica Electrica.

The Trend Of ROCE

There is reason to be cautious about Societatea Energetica Electrica, given the returns are trending downwards. To be more specific, the ROCE was 8.6% 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 Societatea Energetica Electrica to turn into a multi-bagger.

In Conclusion...

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 20% 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 1 warning sign for Societatea Energetica Electrica that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
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