What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating ReNew Energy Global (NASDAQ:RNW), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for ReNew Energy Global:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = ₹40b ÷ (₹779b - ₹145b) (Based on the trailing twelve months to June 2023).
Therefore, ReNew Energy Global has an ROCE of 6.4%. On its own that's a low return, but compared to the average of 2.7% generated by the Renewable Energy industry, it's much better.
View our latest analysis for ReNew Energy Global
In the above chart we have measured ReNew Energy Global'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 ReNew Energy Global.
What Can We Tell From ReNew Energy Global's ROCE Trend?
There are better returns on capital out there than what we're seeing at ReNew Energy Global. The company has employed 97% more capital in the last five years, and the returns on that capital have remained stable at 6.4%. 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.
The Bottom Line On ReNew Energy Global's ROCE
As we've seen above, ReNew Energy Global's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly then, the total return to shareholders over the last year has been flat. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
On a final note, we found 2 warning signs for ReNew Energy Global (1 can't be ignored) you should be aware of.
While ReNew Energy Global may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.