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If you're looking for a multi-bagger, there's a few things to 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Enphase Energy (NASDAQ:ENPH) so let's look a bit deeper.
Understanding 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 Enphase Energy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$256m ÷ (US$2.1b - US$357m) (Based on the trailing twelve months to June 2021).
Therefore, Enphase Energy has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 13% generated by the Semiconductor industry.
In the above chart we have measured Enphase Energy's 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 Enphase Energy here for free.
What Can We Tell From Enphase Energy's ROCE Trend?
We're delighted to see that Enphase Energy is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 15% which is a sight for sore eyes. In addition to that, Enphase Energy is employing 2,459% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
One more thing to note, Enphase Energy has decreased current liabilities to 17% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
The Bottom Line On Enphase Energy's ROCE
To the delight of most shareholders, Enphase Energy has now broken into profitability. Since the stock has returned a staggering 15,365% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Like most companies, Enphase Energy does come with some risks, and we've found 4 warning signs that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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