E.ON (ETR:EOAN) Is Doing The Right Things To Multiply Its Share Price

Simply Wall St · 09/28 07:23

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at E.ON (ETR:EOAN) 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 E.ON, this is the formula:

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

0.061 = €4.7b ÷ (€109b - €31b) (Based on the trailing twelve months to June 2024).

Thus, E.ON has an ROCE of 6.1%. Even though it's in line with the industry average of 6.4%, it's still a low return by itself.

View our latest analysis for E.ON

roce
XTRA:EOAN Return on Capital Employed September 28th 2024

Above you can see how the current ROCE for E.ON compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering E.ON for free.

What Does the ROCE Trend For E.ON Tell Us?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 6.1%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 105%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From E.ON's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what E.ON has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 90% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to know some of the risks facing E.ON we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.