If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Having said that, from a first glance at Montauk Renewables (NASDAQ:MNTK) 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 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. Analysts use this formula to calculate it for Montauk Renewables:

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

0.077 = US$25m ÷ (US$350m - US$29m) (Based on the trailing twelve months to December 2023).

Thus, Montauk Renewables has an ROCE of 7.7%. In absolute terms, that's a low return, but it's much better than the Renewable Energy industry average of 5.9%.

Check out our latest analysis for Montauk Renewables

In the above chart we have measured Montauk Renewables' 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 analyst report for Montauk Renewables .

What Does the ROCE Trend For Montauk Renewables Tell Us?

On the surface, the trend of ROCE at Montauk Renewables doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Montauk Renewables' ROCE

In summary, we're somewhat concerned by Montauk Renewables' diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 60% over the last three years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 1 warning sign with Montauk Renewables and understanding this should be part of your investment process.

While Montauk Renewables 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.