If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at ReNew Energy Global (NASDAQ:RNW) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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 ReNew Energy Global, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = ₹45b ÷ (₹887b - ₹165b) (Based on the trailing twelve months to December 2023).
Thus, ReNew Energy Global has an ROCE of 6.3%. In absolute terms, that's a low return, but it's much better than the Renewable Energy industry average of 3.2%.
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're interested, you can view the analysts predictions in our free analyst 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. Over the past five years, ROCE has remained relatively flat at around 6.3% and the business has deployed 112% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Key Takeaway
In summary, ReNew Energy Global has simply been reinvesting capital and generating the same low rate of return as before. And investors appear hesitant that the trends will pick up because the stock has fallen 46% in the last three years. Therefore based on the analysis done in this article, we don't think ReNew Energy Global has the makings of a multi-bagger.
On a final note, we found 2 warning signs for ReNew Energy Global (1 is concerning) you should be aware of.
While ReNew Energy Global 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.