If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Ormat Technologies (NYSE:ORA), it didn't seem to tick all of these boxes.

What Is 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 Ormat Technologies, this is the formula:

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

0.036 = US$169m ÷ (US$5.2b - US$537m) (Based on the trailing twelve months to December 2023).

Therefore, Ormat Technologies has an ROCE of 3.6%. Even though it's in line with the industry average of 3.6%, it's still a low return by itself.

Above you can see how the current ROCE for Ormat Technologies 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 Ormat Technologies .

What Does the ROCE Trend For Ormat Technologies Tell Us?

We weren't thrilled with the trend because Ormat Technologies' ROCE has reduced by 48% over the last five years, while the business employed 69% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Ormat Technologies' earnings and if they change as a result from the capital raise. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

The Bottom Line On Ormat Technologies' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Ormat Technologies is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 28% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Ormat Technologies does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

While Ormat Technologies 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.