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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Eneco Energy's (SGX:R14) returns on capital, so let's have a look.
What Is 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 Eneco Energy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = S$261k ÷ (S$31m - S$7.2m) (Based on the trailing twelve months to December 2023).
Therefore, Eneco Energy has an ROCE of 1.1%. Even though it's in line with the industry average of 1.4%, it's still a low return by itself.
View our latest analysis for Eneco Energy
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Eneco Energy's past further, check out this free graph covering Eneco Energy's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Like most people, we're pleased that Eneco Energy is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 37% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Eneco Energy could be selling under-performing assets since the ROCE is improving.
One more thing to note, Eneco Energy has decreased current liabilities to 23% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
The Bottom Line On Eneco Energy's ROCE
From what we've seen above, Eneco Energy has managed to increase it's returns on capital all the while reducing it's capital base. Although the company may be facing some issues elsewhere since the stock has plunged 89% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.