If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Electricité de France ( EPA:EDF ) and its ROCE trend, we weren’t exactly thrilled. 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. The formula for this calculation on Electricité de France is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.029 = €7.5b ÷ (€318b – €61b) (Based on the trailing twelve months to June 2021) .
So, Electricité de France has an ROCE of 2.9%. In absolute terms, that’s a low return and it also under-performs the Electric Utilities industry average of 6.9%. ENXTPA:EDF Return on Capital Employed November 3rd 2021 In the above chart we have measured Electricité de France’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Electricité de France . What Can We Tell From Electricité de France’s ROCE Trend?
The returns on capital haven’t changed much for Electricité de France in recent years. Over the past five years, ROCE has remained relatively flat at around 2.9% and the business has deployed 22% 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. Our Take On Electricité de France’s ROCE
In conclusion, Electricité de France has been investing more capital into the business, but returns on that capital haven’t increased. Although the market must be expecting these trends to improve because the stock has gained 57% 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.
On a separate note, we’ve found 3 warning signs for Electricité de France you’ll probably want to 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.
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 […]