Returns On Capital At ACWA POWER (TADAWUL:2082) Have Stalled

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think ACWA POWER (TADAWUL:2082) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 ACWA POWER, this is the formula:

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

0.037 = ر.س1.7b ÷ (ر.س52b - ر.س5.5b) (Based on the trailing twelve months to June 2022).

So, ACWA POWER has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 7.1%.

Check out the opportunities and risks within the XX Renewable Energy industry.

Above you can see how the current ROCE for ACWA POWER 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 ACWA POWER here for free.

What The Trend Of ROCE Can Tell Us

In terms of ACWA POWER's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 3.7% for the last five years, and the capital employed within the business has risen 83% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

Long story short, while ACWA POWER has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 123% return in the last year, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching ACWA POWER, you might be interested to know about the 1 warning sign that our analysis has discovered.

While ACWA POWER isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.