Return Trends At Montauk Renewables (NASDAQ:MNTK) Aren't Appealing

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Montauk Renewables (NASDAQ:MNTK), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Montauk Renewables:

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

0.091 = US$27m ÷ (US$336m - US$35m) (Based on the trailing twelve months to June 2023).

Therefore, Montauk Renewables has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 2.7% generated by the Renewable Energy industry, it's much better.

See our latest analysis for Montauk Renewables

In the above chart we have measured Montauk Renewables' 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 Montauk Renewables here for free.

What Does the ROCE Trend For Montauk Renewables Tell Us?

The returns on capital haven't changed much for Montauk Renewables in recent years. The company has employed 34% more capital in the last four years, and the returns on that capital have remained stable at 9.1%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

As we've seen above, Montauk Renewables' returns on capital haven't increased but it is reinvesting in the business. And in the last year, the stock has given away 30% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Montauk Renewables does have some risks though, and we've spotted 2 warning signs for Montauk Renewables that you might be interested in.

While Montauk Renewables 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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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.