Investors Met With Slowing Returns on Capital At TransAlta Renewables (TSE:RNW)
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. However, after briefly looking over the numbers, we don't think TransAlta Renewables (TSE:RNW) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for TransAlta Renewables, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.035 = CA$101m ÷ (CA$3.4b - CA$444m) (Based on the trailing twelve months to September 2022).
Therefore, TransAlta Renewables has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 4.6%.
Check out our latest analysis for TransAlta Renewables
In the above chart we have measured TransAlta Renewables' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering TransAlta Renewables here for free.
The Trend Of ROCE
Over the past five years, TransAlta Renewables' ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if TransAlta Renewables doesn't end up being a multi-bagger in a few years time. That being the case, it makes sense that TransAlta Renewables has been paying out 134% of its earnings to its shareholders. Most shareholders probably know this and own the stock for its dividend.
The Bottom Line On TransAlta Renewables' ROCE
We can conclude that in regards to TransAlta Renewables' returns on capital employed and the trends, there isn't much change to report on. Since the stock has gained an impressive 40% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for TransAlta Renewables (of which 1 is a bit concerning!) that you should know about.
While TransAlta 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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