If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Federal Hydro-Generating Company - RusHydro's (MCX:HYDR) returns on capital, so let's have a look.
What is 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 Federal Hydro-Generating Company - RusHydro, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = ₽93b ÷ (₽964b - ₽163b) (Based on the trailing twelve months to September 2021).
So, Federal Hydro-Generating Company - RusHydro has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Electric Utilities industry average of 8.3% it's much better.
In the above chart we have measured Federal Hydro-Generating Company - RusHydro'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
Federal Hydro-Generating Company - RusHydro is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 61% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Bottom Line On Federal Hydro-Generating Company - RusHydro's ROCE
To bring it all together, Federal Hydro-Generating Company - RusHydro has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 2.9% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
One more thing: We've identified 3 warning signs with Federal Hydro-Generating Company - RusHydro (at least 1 which is concerning) , and understanding these would certainly be useful.
While Federal Hydro-Generating Company - RusHydro 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.
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.