Investors Met With Slowing Returns on Capital At Montauk Renewables (NASDAQ:MNTK)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Montauk Renewables (NASDAQ:MNTK), it didn't seem to tick all of these boxes.

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Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Montauk Renewables is:

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

0.056 = US$18m ÷ (US$349m - US$34m) (Based on the trailing twelve months to December 2024).

Therefore, Montauk Renewables has an ROCE of 5.6%. On its own that's a low return, but compared to the average of 4.0% generated by the Renewable Energy industry, it's much better.

View our latest analysis for Montauk Renewables

Above you can see how the current ROCE for Montauk Renewables 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 Montauk Renewables for free.

What Does the ROCE Trend For Montauk Renewables Tell Us?

In terms of Montauk Renewables' historical ROCE trend, it doesn't exactly demand attention. The company has employed 43% more capital in the last five years, and the returns on that capital have remained stable at 5.6%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Montauk Renewables' ROCE

Long story short, while Montauk Renewables has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 82% over the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to continue researching Montauk Renewables, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.