Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Eneco Energy (SGX:R14) so let's look a bit deeper.
What Is 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. Analysts use this formula to calculate it for Eneco Energy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.036 = S$857k ÷ (S$39m - S$15m) (Based on the trailing twelve months to September 2022).
Therefore, Eneco Energy has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Logistics industry average of 5.1%.
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 of past earnings, revenue and cash flow.
How Are Returns Trending?
Like most people, we're pleased that Eneco Energy is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 3.6% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 64%. This could potentially mean that the company is selling some of its assets.
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. And since the stock has dived 85% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.
Eneco Energy does have some risks, we noticed 3 warning signs (and 2 which are potentially serious) we think you should know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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