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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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at Boralex (TSE:BLX) and its trend of ROCE, we really liked what we saw.
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 Boralex, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = CA$271m ÷ (CA$6.6b - CA$657m) (Based on the trailing twelve months to September 2024).
Therefore, Boralex has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 7.3%.
View our latest analysis for Boralex
In the above chart we have measured Boralex's 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 Boralex for free.
So How Is Boralex's ROCE Trending?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 4.6%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 41%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line On Boralex's ROCE
To sum it up, Boralex has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 29% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Boralex (of which 1 can't be ignored!) that you should know about.