Return Trends At ReNew Energy Global (NASDAQ:RNW) Aren't Appealing
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think ReNew Energy Global (NASDAQ:RNW) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)
0.065 = ₹44b ÷ (₹813b - ₹137b) (Based on the trailing twelve months to September 2023).
Thus, ReNew Energy Global has an ROCE of 6.5%. In absolute terms, that's a low return, but it's much better than the Renewable Energy industry average of 3.2%.
See our latest analysis for ReNew Energy Global
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 report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
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 6.5% and the business has deployed 110% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
Our Take On ReNew Energy Global's ROCE
In conclusion, ReNew Energy Global has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 38% over the last year, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
One more thing: We've identified 2 warning signs with ReNew Energy Global (at least 1 which is a bit concerning) , and understanding these would certainly be useful.
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.
