When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Romande Energie Holding (VTX:HREN), we've spotted some signs that it could be struggling, so let's investigate.
Return On Capital Employed (ROCE): What Is It?
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)
0.024 = CHF55m ÷ (CHF2.4b - CHF181m) (Based on the trailing twelve months to December 2022).
So, Romande Energie Holding has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 8.8%.
Check out 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 report for Romande Energie Holding.
What The Trend Of ROCE Can Tell Us
There is reason to be cautious about Romande Energie Holding, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 3.4% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Romande Energie Holding to turn into a multi-bagger.
Our Take On Romande Energie Holding's ROCE
In summary, it's unfortunate that Romande Energie Holding is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 26% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.