What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at ReNew Energy Global (NASDAQ:RNW) and its ROCE trend, we weren't exactly thrilled.
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. To calculate this metric for ReNew Energy Global, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = ₹44b ÷ (₹895b - ₹156b) (Based on the trailing twelve months to June 2024).
So, ReNew Energy Global has an ROCE of 5.9%. On its own that's a low return, but compared to the average of 4.2% generated by the Renewable Energy industry, it's much better.
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're interested, you can view the analysts predictions in our free analyst report for ReNew Energy Global .
How Are Returns Trending?
There are better returns on capital out there than what we're seeing at ReNew Energy Global. Over the past five years, ROCE has remained relatively flat at around 5.9% and the business has deployed 91% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line On ReNew Energy Global's ROCE
In conclusion, ReNew Energy Global has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has declined 44% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think ReNew Energy Global has the makings of a multi-bagger.
One more thing: We've identified 2 warning signs with ReNew Energy Global (at least 1 which is a bit concerning) , and understanding them would certainly be useful.
While ReNew Energy Global may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
