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Via Renewables (NASDAQ:VIA) Will Be Looking To Turn Around Its Returns

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Via Renewables (NASDAQ:VIA), the trends above didn't look too great.

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. The formula for this calculation on Via Renewables is:

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

0.25 = US$69m ÷ (US$353m - US$70m) (Based on the trailing twelve months to March 2022).

Thus, Via Renewables has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 4.8% earned by companies in a similar industry.

Check out our latest analysis for Via Renewables

roce
roce

Historical performance is a great place to start when researching a stock so above you can see the gauge for Via Renewables' ROCE against it's prior returns. If you'd like to look at how Via Renewables has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Via Renewables, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 35% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Via Renewables to turn into a multi-bagger.

On a side note, Via Renewables has done well to pay down its current liabilities to 20% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

In summary, it's unfortunate that Via Renewables is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 47% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Via Renewables does have some risks though, and we've spotted 2 warning signs for Via Renewables that you might be interested in.

Via Renewables is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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.