If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Ormat Technologies (NYSE:ORA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Ormat Technologies is:

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

0.034 = US$170m ÷ (US$5.5b - US$546m) (Based on the trailing twelve months to March 2024).

So, Ormat Technologies has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 5.7%.

In the above chart we have measured Ormat Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Ormat Technologies .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Ormat Technologies, we didn't gain much confidence. To be more specific, ROCE has fallen from 6.6% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Ormat Technologies' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Ormat Technologies. In light of this, the stock has only gained 24% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Ormat Technologies does have some risks though, and we've spotted 1 warning sign for Ormat Technologies that you might be interested in.

While Ormat Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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