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There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Fluence Energy (NASDAQ:FLNC) so let's look a bit deeper.
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. To calculate this metric for Fluence Energy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = US$27m ÷ (US$1.9b - US$1.3b) (Based on the trailing twelve months to September 2024).
Therefore, Fluence Energy has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Electrical industry average of 11%.
View our latest analysis for Fluence Energy
In the above chart we have measured Fluence Energy's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Fluence Energy .
How Are Returns Trending?
Fluence Energy has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 4.1% on its capital. Not only that, but the company is utilizing 2,190% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
One more thing to note, Fluence Energy has decreased current liabilities to 66% 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. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.
What We Can Learn From Fluence Energy's ROCE
To the delight of most shareholders, Fluence Energy has now broken into profitability. And since the stock has fallen 43% over the last three years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.