Returns On Capital At ReNew Energy Global (NASDAQ:RNW) Have Hit The Brakes

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at ReNew Energy Global (NASDAQ:RNW), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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

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

0.064 = ₹40b ÷ (₹779b - ₹145b) (Based on the trailing twelve months to June 2023).

Thus, ReNew Energy Global has an ROCE of 6.4%. On its own that's a low return, but compared to the average of 2.9% generated by the Renewable Energy industry, it's much better.

Check out our latest analysis for ReNew Energy Global

Above you can see how the current ROCE for ReNew Energy Global compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for ReNew Energy Global.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at ReNew Energy Global. The company has consistently earned 6.4% for the last five years, and the capital employed within the business has risen 97% in that time. 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.

What We Can Learn From ReNew Energy Global's ROCE

Long story short, while ReNew Energy Global has been reinvesting its capital, the returns that it's generating haven't increased. And in the last year, the stock has given away 22% so the market doesn't look too hopeful on these trends strengthening any time soon. 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 know some of the risks facing ReNew Energy Global we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.