Returns are gaining momentum at Renewable Energy Group (NASDAQ: REGI)
Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we take a look at a few key financial metrics. Generally, we will want to notice a growing trend to recover on capital employed (ROCE) and at the same time, a based capital employed. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. So on that note, Renewable Energy Group (NASDAQ: REGI) looks pretty promising when it comes to its return on capital trends.
Understanding Return on Capital Employed (ROCE)
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. The formula for this calculation on Renewable Energy Group is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.095 = US $ 208 million ÷ (US $ 2.4 billion – US $ 217 million) (Based on the last twelve months up to June 2021).
Thereby, Renewable Energy Group posts a ROCE of 9.5%. In absolute terms, that’s a poor return, but it’s way better than the oil and gas industry average of 7.0%.
Check out our latest review for Renewable Energy Group
Above you can see how Renewable Energy Group’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
So what is the ROCE trend for Renewable Energy Group?
Even though the ROCE is still low in absolute terms, it is good to see that it is moving in the right direction. Figures show that over the past five years, returns on capital employed have increased significantly to 9.5%. Basically the business earns more per dollar of capital invested and on top of that 123% more capital is also used. Increasing returns on an increasing amount of capital are common among multi-baggers and that is why we are impressed.
Our point of view on the ROCE of the renewable energy group
In summary, it’s great to see that Renewable Energy Group can increase returns by systematically reinvesting capital at increasing rates of return, as these are some of the key ingredients in these highly sought-after multi-baggers. Given that the stock has returned 464% to shareholders over the past five years, it seems investors are recognizing these changes. That being said, we still believe promising fundamentals mean the company deserves additional due diligence.
Since virtually every business faces risks, it’s worth knowing about them, and we’ve spotted 5 warning signs for Renewable Energy Group (1 of which is a bit disturbing!) that you should know about.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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