There's Been No Shortage Of Growth Recently For Enphase Energy's (NASDAQ:ENPH) Returns On Capital

By
Simply Wall St
Published
January 12, 2022
NasdaqGM:ENPH
Source: Shutterstock

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Enphase Energy (NASDAQ:ENPH) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Enphase Energy:

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

0.13 = US$241m ÷ (US$2.2b - US$393m) (Based on the trailing twelve months to September 2021).

Thus, Enphase Energy has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Semiconductor industry average of 15%.

View our latest analysis for Enphase Energy

roce
NasdaqGM:ENPH Return on Capital Employed January 12th 2022

In the above chart we have measured Enphase Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Enphase Energy here for free.

What The Trend Of ROCE Can Tell Us

The fact that Enphase Energy is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 13% on its capital. In addition to that, Enphase Energy is employing 1,924% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 18%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Enphase Energy has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

Long story short, we're delighted to see that Enphase Energy's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 8,901% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Enphase Energy can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 5 warning signs with Enphase Energy and understanding these should be part of your investment process.

While Enphase Energy may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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