Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Romande Energie Holding (VTX:REHN) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Romande Energie Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.038 = CHF90m ÷ (CHF2.5b - CHF176m) (Based on the trailing twelve months to June 2023).
Therefore, Romande Energie Holding has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 7.0%.
See our latest analysis for Romande Energie Holding
In the above chart we have measured Romande Energie Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Romande Energie Holding .
What Does the ROCE Trend For Romande Energie Holding Tell Us?
Over the past five years, Romande Energie Holding's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Romande Energie Holding doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that Romande Energie Holding has been paying out a decent 38% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.
Our Take On Romande Energie Holding's ROCE
In summary, Romande Energie Holding isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 38% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.