These performance indicators do not give the impression that Romande Energie Holding (VTX:HREN) is too strong
Ignoring a company’s stock price, what are the underlying trends that tell us that a company is past the growth phase? More often than not we will see a decline to return to on capital employed (ROCE) and a decrease quantity capital employed. This reveals that the company is not increasing shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking at Romande Energie Holding (VTX:HREN), we weren’t too optimistic about how things were going.
Return on capital employed (ROCE): what is it?
If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. To calculate this metric for Romande Energie Holding, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.029 = CHF 63 million ÷ (CHF 2.3 billion – CHF 152 million) (Based on the last twelve months to June 2021).
Therefore, Romande Energie Holding posted a ROCE of 2.9%. In absolute terms, that’s a poor performer, and it’s also below the electric utility industry average of 7.2%.
Discover our latest analysis for Romande Energie Holding
Above, you can see how Romande Energie Holding’s current ROCE compares to its past returns on capital, but there’s little you can say about the past. If you want to see what analysts are predicting for the future, you should check out our free report for Romande Energie Holding.
What the ROCE trend can tell us
Caution is warranted vis-à-vis Romande Energie Holding, given that yields are on the downside. About five years ago, the return on capital was 4.5%, but now it is significantly lower than what we saw above. In addition to this, it should be noted that the amount of capital used within the company remained relatively stable. Given that yields are down and the business is using the same amount of assets, this may suggest that it is a mature business that hasn’t seen much growth over the past five years. . If these trends continue, Romande Energie Holding should not be expected to turn into a multi-bagger.
Ultimately, the tendency for lower returns on the same amount of capital is generally not an indication that we are considering a growth stock. Investors should expect better things on the horizon, however, as the stock is up 24% over the past five years. Either way, we don’t like the trends as they are and if they persist, we think you might find better investments elsewhere.
Although Romande Energie Holding does not shine too brightly in this respect, it is still worth seeing if the company is trading at attractive prices. You can find out with our FREE Intrinsic Value Estimate on our platform.
Although Romande Energie Holding does not get the highest return, check this free list of companies that achieve high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.