What Societatea Energetica Electrica's (BVB:EL) Returns On Capital Can Tell Us

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. 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 we looked into Societatea Energetica Electrica (BVB:EL), the trends above didn't look too great.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Societatea Energetica Electrica:

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

0.069 = RON452m ÷ (RON8.1b - RON1.5b) (Based on the trailing twelve months to December 2020).

Therefore, Societatea Energetica Electrica has an ROCE of 6.9%. On its own, that's a low figure but it's around the 6.4% average generated by the Electric Utilities industry.

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, you can check out the forecasts from the analysts covering Societatea Energetica Electrica here for free.

The Trend Of ROCE

There is reason to be cautious about Societatea Energetica Electrica, given the returns are trending downwards. About five years ago, returns on capital were 8.8%, 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. If these trends continue, we wouldn't expect Societatea Energetica Electrica to turn into a multi-bagger.

What We Can Learn From Societatea Energetica Electrica's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 55% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 1 warning sign for Societatea Energetica Electrica you'll probably want to know about.

While Societatea Energetica Electrica may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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