If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. In light of that, when we looked at Energix – Renewable Energies (TLV:ENRG) and its ROCE trend, we weren’t exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Energix – Renewable Energies, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.036 = ₪318m ÷ (₪11b – ₪2.0b) (Based on the trailing twelve months to September 2024).

So, Energix – Renewable Energies has an ROCE of 3.6%. Even though it’s in line with the industry average of 3.5%, it’s still a low return by itself.

Check out our latest analysis for Energix – Renewable Energies

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 Energix – Renewable Energies’ past further, check out this free graph covering Energix – Renewable Energies’ past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Energix – Renewable Energies’ historical ROCE movements, the trend isn’t fantastic. Over the last five years, returns on capital have decreased to 3.6% from 5.8% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Energix – Renewable Energies’ current liabilities have increased over the last five years to 19% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn’t increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Key Takeaway

In summary, despite lower returns in the short term, we’re encouraged to see that Energix – Renewable Energies is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 39% gain to shareholders who’ve held over the last five years. Therefore we’d recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing: We’ve identified 4 warning signs with Energix – Renewable Energies (at least 2 which can’t be ignored) , and understanding these would certainly be useful.

While Energix – Renewable Energies 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.