What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, RWE (ETR:RWE) looks quite promising in regards to its trends of return on capital.
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. Analysts use this formula to calculate it for RWE:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0031 = €216m ÷ (€109b - €39b) (Based on the trailing twelve months to September 2023).
Thus, RWE has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 5.7%.
View our latest analysis for RWE
Above you can see how the current ROCE for RWE 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 RWE.
So How Is RWE's ROCE Trending?
We're delighted to see that RWE is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.3% on its capital. And unsurprisingly, like most companies trying to break into the black, RWE is utilizing 103% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 36%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
What We Can Learn From RWE's ROCE
Long story short, we're delighted to see that RWE's reinvestment activities have paid off and the company is now profitable. And a remarkable 124% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if RWE can keep these trends up, it could have a bright future ahead.