ReNew Energy Global ( NASDAQ:RNW ) may have trouble allocating its capital

Finding a company that has the potential for significant growth isn’t easy, but it is possible if you consider a few key financial metrics. Typically we will want to notice an upward trend return on capital employed (ROCE), and therefore, it is developing base capital employed. This shows us that it is a compounding machine, capable of continually reinvesting its profits back into the business and generating higher profits. However, after a quick look at the numbers, it doesn’t come to mind Global company ReNew Energy (NASDAQ:RNW) has the makings of a multi-bag company, but let’s take a look at why that is.

Understanding return on capital employed (ROCE)

To clarify, if you’re not sure, ROCE is a metric that allows you to assess how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for ReNew Energy Global, use the following formula:

Return on capital employed = Earnings before interest and tax (EBIT) ÷ (Total assets – Short-term liabilities)

0.069 = ₹51b ÷ (₹875b – ₹143b) (Based on the trailing twelve months to March 2024).

This is why, ReNew Energy Global has an ROCE of 6.9%. In absolute terms, this is a low return, but much better than the renewable energy industry average of 5.5%.

View our latest analysis for ReNew Energy Global

Above you can see how ReNew Energy Global’s current ROCE compares to its past returns on equity, but there’s only so much you can tell from the past. If you are interested, you can read analysts’ predictions on our website free analyst report for ReNew Energy Global.

How do returns trend?

When it comes to ReNew Energy Global’s historical ROCE movements, the trend is not fantastic. More specifically, ROCE has declined from 9.0% over the last five years. Meanwhile, the company is using more capital, but it hasn’t moved the needle much in terms of sales over the last 12 months, so this may reflect long-term investment. From this point on, it’s worth monitoring the company’s profits to see if these investments will actually translate into financial results.

The story continues

ReNew Energy Global’s ROCE summary

In summary, ReNew Energy Global is reinvesting funds into its business for growth, but unfortunately it appears that sales have not increased much yet. The stock has lost 38% over the past three years, so the market is not optimistic that these trends will strengthen in the near future. All in all, the inherent trends are not typical of multi-bag companies, so if that’s what you’re looking for, we think you may have better luck elsewhere.

We’ve identified one more thing worth paying attention to 1 warning sign with ReNew Energy Global and understanding that it should be part of your investment process.

If you want to look for solid companies with great earnings, check this out free a list of companies with strong balance sheets and impressive returns on equity.

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This article by Simply Wall St is of a general nature. We comment based on historical data and analyst forecasts, using only an unbiased methodology, and our articles are not intended to provide financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide long-term, focused analysis based on fundamental data. Please note that our analysis may not reflect the latest price-sensitive company announcements or qualitative content. Simply Wall St has no position in any of the stocks mentioned.

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