Investors Should Be Encouraged By S.P.E.E.H. Hidroelectrica's (BVB:H2O) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of S.P.E.E.H. Hidroelectrica (BVB:H2O) we really liked what we saw.

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. The formula for this calculation on S.P.E.E.H. Hidroelectrica is:

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

0.21 = RON5.3b ÷ (RON26b - RON1.2b) (Based on the trailing twelve months to September 2024).

Thus, S.P.E.E.H. Hidroelectrica has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Renewable Energy industry average of 6.1%.

Check out our latest analysis for S.P.E.E.H. Hidroelectrica

In the above chart we have measured S.P.E.E.H. Hidroelectrica'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 analyst report for S.P.E.E.H. Hidroelectrica .

What The Trend Of ROCE Can Tell Us

The trends we've noticed at S.P.E.E.H. Hidroelectrica are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 21%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 48%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On S.P.E.E.H. Hidroelectrica's ROCE

In summary, it's great to see that S.P.E.E.H. Hidroelectrica can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has only returned 6.3% to shareholders over the last year, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

On a final note, we've found 2 warning signs for S.P.E.E.H. Hidroelectrica that we think you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.