To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at ReNew Energy Global (NASDAQ:RNW), it didn't seem to tick all of these boxes.
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. Analysts use this formula to calculate it for ReNew Energy Global:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.06 = ₹43b ÷ (₹887b - ₹165b) (Based on the trailing twelve months to December 2023).
So, ReNew Energy Global has an ROCE of 6.0%. On its own, that's a low figure but it's around the 5.5% average generated by the Renewable Energy industry.
In the above chart we have measured ReNew Energy Global's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering ReNew Energy Global for free.
How Are Returns Trending?
When we looked at the ROCE trend at ReNew Energy Global, we didn't gain much confidence. Around five years ago the returns on capital were 7.6%, but since then they've fallen to 6.0%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that ReNew Energy Global is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 39% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
ReNew Energy Global does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.
While ReNew Energy Global isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.