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. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we’ve noticed some promising trends at Enlight Renewable Energy (TLV:ENLT) so let’s look a bit deeper.

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. The formula for this calculation on Enlight Renewable Energy is:

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

0.03 = US$120m ÷ (US$4.8b – US$763m) (Based on the trailing twelve months to June 2024).

Thus, Enlight Renewable Energy has an ROCE of 3.0%. On its own that’s a low return on capital but it’s in line with the industry’s average returns of 3.5%.

See our latest analysis for Enlight Renewable Energy

Above you can see how the current ROCE for Enlight Renewable Energy 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 analyst report for Enlight Renewable Energy .

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it’s good to see it’s heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 3.0%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 304%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.

The Key Takeaway

To sum it up, Enlight Renewable Energy has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 47% to shareholders over the last five years, it’s fair to say investors are beginning to recognize these changes. In light of that, we think it’s worth looking further into this stock because if Enlight Renewable Energy can keep these trends up, it could have a bright future ahead.

On a separate note, we’ve found 2 warning signs for Enlight Renewable Energy you’ll probably want to 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.

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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.