EnviTec Biogas: A Masterclass in Compounding Returns and Capital Efficiency

In the world of investing, few concepts are as powerful as compounding returns. The ability to reinvest earnings at increasing rates of return—what Warren Buffett famously called the “eighth wonder of the world”—is the hallmark of enduring businesses. EnviTec Biogas (ETR:ETG), a German leader in biogas and biomethane production, is emerging as a compelling case study in this art. With a rising Return on Capital Employed (ROCE), strategic reinvestment in high-margin projects, and a valuation that appears disconnected from its fundamentals, the company is positioning itself as a high-conviction long-term opportunity.

The ROCE Story: From 10% to 28% in Five Years

EnviTec's ROCE has surged from 10.83% in 2020 to 27.79% by December 2024, a trajectory that underscores its growing efficiency in deploying capital. This metric, which measures how effectively a company generates profits from its total capital base, has consistently outperformed the Oil and Gas industry average of 9.9%. The company's ability to scale its capital employed by 57% over the same period while boosting ROCE is a testament to its compounding prowess.

The secret lies in EnviTec's reinvestment strategy. For instance, the company has allocated €50 million to convert four of its biogas plants into gas upgrading facilities with integrated CO₂ liquefaction. These projects, completed in early 2025, are expected to enhance the profitability of its Own Plant Operation segment, which contributes the bulk of its earnings. By upgrading infrastructure and capturing higher-value biomethane, EnviTec is not merely maintaining returns—it is accelerating them.

Strategic Shift: From Electricity to Biomethane

EnviTec's long-term vision is to pivot from electricity production to biomethane, a move that aligns with global decarbonization trends. By 2031, the company plans to reduce electricity output from 1,300 GWh to 700 GWh while tripling biomethane production to 1,100 GWh. This shift is not just strategic—it's economically compelling. Biomethane commands higher margins than electricity, particularly in markets where carbon pricing and renewable incentives are gaining traction.

The company's capital efficiency is further bolstered by its diversified revenue streams. While the Plant Construction segment faced headwinds in 2024 due to lower energy prices and project delays, the Service segment grew by 4% in revenues, demonstrating resilience. This diversification reduces exposure to cyclical downturns and ensures a steady cash flow for reinvestment.

Valuation Disconnect: A P/E of 1.96 vs. a ROCE of 28%

Here's where the opportunity becomes strikingly clear. EnviTec's current P/E ratio of 1.96 (as of August 2025) is a fraction of its historical average of 30.71 over the past decade. This 538% discount to its long-term mean suggests a market that is either undervaluing the company's fundamentals or mispricing its future potential.

Consider the math: A ROCE of 28% implies that EnviTec generates €28 in earnings for every €100 of capital employed. If the company can sustain this return while reinvesting a portion of its earnings into projects that maintain or improve this rate, its earnings growth will compound exponentially. Yet, the stock trades at a multiple that assumes a return closer to 0.5%. This disconnect is the kind of mispricing that creates asymmetric opportunities for patient investors.

Risks and Realities

No investment is without risk. EnviTec's 2024 earnings growth turned negative (-51%), driven by lower energy prices and regulatory uncertainties in key markets like the U.S. Additionally, its net profit margin has contracted from 13.2% to 7.9% over the past year. These challenges highlight the importance of monitoring operational efficiency and cost management.

However, the company's strategic pivot to biomethane and its robust equity base (€184.4 million as of 2024) provide a buffer. The global biogas upgrading equipment market, projected to grow at a 16.1% CAGR to $4.57 billion by 2029, offers a tailwind that could offset near-term volatility.

The Case for a High-Conviction Bet

For investors with a 5–10 year horizon, EnviTec Biogas presents a rare combination of compounding returns, strategic reinvestment, and undervaluation. Its ROCE trajectory, coupled with a clear path to higher-margin biomethane production, suggests a business that is not just surviving but thriving in the energy transition.

The current P/E of 1.96 is a discount that cannot be sustained if earnings growth resumes. Even a modest 15% annual earnings growth rate would justify a P/E of 15 within five years, implying a 600% upside. For a company with a ROCE of 28%, such growth is not a stretch—it's a floor.

In a market obsessed with short-term volatility, EnviTec Biogas is a reminder that the best investments are those that compound quietly, patiently, and relentlessly. For those willing to look beyond the noise, this is a name worth watching—and buying.