The Return Trends At ACWA POWER (TADAWUL:2082) Look Promising

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. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at ACWA POWER (TADAWUL:2082) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on ACWA POWER is:

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

0.052 = ر.س2.6b ÷ (ر.س57b - ر.س7.2b) (Based on the trailing twelve months to September 2023).

Therefore, ACWA POWER has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 7.1%.

Check out our latest analysis for ACWA POWER

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 Does the ROCE Trend For ACWA POWER Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 5.2%. Basically the business is earning more per dollar of capital invested and in addition to that, 64% more capital is being employed now too. So we're very much inspired by what we're seeing at ACWA POWER thanks to its ability to profitably reinvest capital.

Our Take On ACWA POWER's ROCE

In summary, it's great to see that ACWA POWER 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. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 58% return over the last year. In light of that, we think it's worth looking further into this stock because if ACWA POWER can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with ACWA POWER and understanding it should be part of your investment process.

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.