Eneco Energy (SGX:R14) Is Doing The Right Things To Multiply Its Share Price

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. 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 Eneco Energy (SGX:R14) and its trend of ROCE, we really liked what we saw.

Understanding 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 Eneco Energy is:

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

0.036 = S$857k ÷ (S$39m - S$15m) (Based on the trailing twelve months to September 2022).

So, Eneco Energy has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 5.1%.

Check out our latest analysis for Eneco Energy

Historical performance is a great place to start when researching a stock so above you can see the gauge for Eneco Energy's ROCE against it's prior returns. If you're interested in investigating Eneco Energy's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Eneco Energy's ROCE Trend?

It's great to see that Eneco Energy has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Eneco Energy is using 64% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

What We Can Learn From Eneco Energy's ROCE

In summary, it's great to see that Eneco Energy has been able to turn things around and earn higher returns on lower amounts of capital. However the stock is down a substantial 88% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

If you'd like to know more about Eneco Energy, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.