Yahoo Finance Investors Met With Slowing Returns on Capital At Brookfield Renewable (TSE:BEPC)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Brookfield Renewable (TSE:BEPC) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Brookfield Renewable:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.04 = US$1.3b ÷ (US$41b - US$8.4b) (Based on the trailing twelve months to September 2022).
Therefore, Brookfield Renewable has an ROCE of 4.0%. On its own, that's a low figure but it's around the 4.7% average generated by the Renewable Energy industry.
See our latest analysis for Brookfield Renewable
Above you can see how the current ROCE for Brookfield Renewable compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Brookfield Renewable.
The Trend Of ROCE
In terms of Brookfield Renewable's historical ROCE trend, it doesn't exactly demand attention. The company has employed 71% more capital in the last four years, and the returns on that capital have remained stable at 4.0%. 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.
Another point to note, we noticed the company has increased current liabilities over the last four years. This is intriguing because if current liabilities hadn't increased to 20% of total assets, this reported ROCE would probably be less than4.0% because total capital employed would be higher.The 4.0% ROCE could be even lower if current liabilities weren't 20% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.
In Conclusion...
In summary, Brookfield Renewable has simply been reinvesting capital and generating the same low rate of return as before. And investors may be recognizing these trends since the stock has only returned a total of 0.6% to shareholders over the last year. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Brookfield Renewable does have some risks, we noticed 4 warning signs (and 2 which are concerning) we think you should know about.
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.
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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