The Return Trends At Eneco Energy (SGX:R14) Look Promising

If you're looking for a multi-bagger, there's a few things to 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Eneco Energy (SGX:R14) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

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 Eneco Energy is:

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

0.011 = S$261k ÷ (S$31m - S$7.2m) (Based on the trailing twelve months to December 2023).

Thus, Eneco Energy has an ROCE of 1.1%. Even though it's in line with the industry average of 1.4%, it's still a low return by itself.

View 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 covering Eneco Energy's past earnings, revenue and cash flow.

So How Is Eneco Energy's ROCE Trending?

Like most people, we're pleased that Eneco Energy is now generating some pretax earnings. 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 37% 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. Eneco Energy could be selling under-performing assets since the ROCE is improving.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 23%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

In a nutshell, we're pleased to see that Eneco Energy has been able to generate higher returns from less 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. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

Eneco Energy does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.