We Like These Underlying Return On Capital Trends At ACWA POWER (TADAWUL:2082)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in ACWA POWER's (TADAWUL:2082) returns on capital, so let's have a look.

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. 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)

0.048 = ر.س2.1b ÷ (ر.س51b - ر.س7.0b) (Based on the trailing twelve months to September 2022).

Therefore, ACWA POWER has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 7.0%.

Check out our latest analysis for ACWA POWER

In the above chart we have measured ACWA POWER's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for ACWA POWER.

What Can We Tell From ACWA POWER's ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 4.8%. 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 63%. So we're very much inspired by what we're seeing at ACWA POWER thanks to its ability to profitably reinvest capital.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what ACWA POWER has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 61% return over the last year. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

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.