Some Investors May Be Worried About ReNew Energy Global's (NASDAQ:RNW) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at ReNew Energy Global (NASDAQ:RNW) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for ReNew Energy Global:

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

0.06 = ₹43b ÷ (₹887b - ₹165b) (Based on the trailing twelve months to December 2023).

Thus, ReNew Energy Global has an ROCE of 6.0%. Even though it's in line with the industry average of 5.9%, it's still a low return by itself.

See our latest analysis for ReNew Energy Global

In the above chart we have measured ReNew Energy Global's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for ReNew Energy Global .

So How Is ReNew Energy Global's ROCE Trending?

On the surface, the trend of ROCE at ReNew Energy Global doesn't inspire confidence. Around five years ago the returns on capital were 7.6%, but since then they've fallen to 6.0%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On ReNew Energy Global's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that ReNew Energy Global is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 42% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about ReNew Energy Global, we've spotted 2 warning signs, and 1 of them is potentially serious.

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.