Ormat Technologies (NYSE:ORA) Could Be Struggling To Allocate Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Ormat Technologies (NYSE:ORA) 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)

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 Ormat Technologies:

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

0.034 = US$170m ÷ (US$5.5b - US$546m) (Based on the trailing twelve months to March 2024).

So, Ormat Technologies has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 5.7%.

See our latest analysis for Ormat Technologies

Above you can see how the current ROCE for Ormat Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Ormat Technologies .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Ormat Technologies doesn't inspire confidence. Around five years ago the returns on capital were 6.6%, but since then they've fallen to 3.4%. 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 Ormat Technologies' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Ormat Technologies is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 20% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you want to continue researching Ormat Technologies, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Ormat Technologies 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.

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