Yahoo Finance Returns At EnBW Energie Baden-Württemberg (ETR:EBK) Appear To Be Weighed Down
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think EnBW Energie Baden-Württemberg (ETR:EBK) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 EnBW Energie Baden-Württemberg, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.038 = €1.4b ÷ (€71b - €35b) (Based on the trailing twelve months to June 2022).
Therefore, EnBW Energie Baden-Württemberg has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 8.8%.
Check out our latest analysis for EnBW Energie Baden-Württemberg
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 EnBW Energie Baden-Württemberg's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is EnBW Energie Baden-Württemberg's ROCE Trending?
There are better returns on capital out there than what we're seeing at EnBW Energie Baden-Württemberg. Over the past five years, ROCE has remained relatively flat at around 3.8% and the business has deployed 27% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 49% of total assets, this reported ROCE would probably be less than3.8% because total capital employed would be higher.The 3.8% ROCE could be even lower if current liabilities weren't 49% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.
In Conclusion...
In conclusion, EnBW Energie Baden-Württemberg has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 247% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
If you want to know some of the risks facing EnBW Energie Baden-Württemberg we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.
While EnBW Energie Baden-Württemberg isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.
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