Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in ReNew Energy Global’s (NASDAQ:RNW) returns on capital, so let’s have a look.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on ReNew Energy Global is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.072 = ₹39b ÷ (₹641b – ₹101b) (Based on the trailing twelve months to March 2022).
Thus, ReNew Energy Global has an ROCE of 7.2%. In absolute terms, that’s a low return, but it’s much better than the Renewable Energy industry average of 3.7%.
View our latest analysis for ReNew Energy Global
Above you can see how the current ROCE for ReNew Energy Global compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for ReNew Energy Global.
What The Trend Of ROCE Can Tell Us
Even though ROCE is still low in absolute terms, it’s good to see it’s heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown significantly to 7.2%. Basically the business is earning more per dollar of capital invested and in addition to that, 236% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
The Key Takeaway
In summary, it’s great to see that ReNew Energy Global can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Given the stock has declined 34% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.
Since virtually every company faces some risks, it’s worth knowing what they are, and we’ve spotted 2 warning signs for ReNew Energy Global (of which 1 doesn’t sit too well with us!) that you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.