# Canadian Solar Inc (NASDAQ:CSIQ): A Look At Return On Capital

I am writing today to help inform people who are new to the stock market and looking to gauge the potential return on investment in Canadian Solar Inc (NASDAQ:CSIQ).

Canadian Solar stock represents an ownership share in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Thus, to understand how your money can grow by investing in Canadian Solar, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).

### What is Return on Capital Employed (ROCE)?

You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. We’ll look at Canadian Solar’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. I have calculated Canadian Solar’s ROCE for you below:

ROCE Calculation for CSIQ

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = US\$229m ÷ (US\$5.2b – US\$3.6b) = 22%

As you can see, CSIQ earned \$21.7 from every \$100 you invested over the previous twelve months. This makes Canadian Solar attractively profitable when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future and is able to either provide solid dividends or reinvestment opportunities, your capital will enlarge at a quick rate over time.

### Can any of this change?

The encouraging ROCE is good news for Canadian Solar investors if the company is able to maintain strong earnings and control their capital needs. But if this doesn’t occur, CSIQ’s ROCE may deteriorate, in which case your money is better invested elsewhere. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking three years in the past, it is evident that CSIQ’s ROCE has risen from 17%, indicating the company’s capital returns have stengthened. Over the same period, EBT went from US\$324m to US\$229m,

### Next Steps

Canadian Solar’s ROCE has increased in the recent past and is above a benchmark that makes the company a potentially attractive stock that can achieve a solid return on investment. This makes the company an attractive place to put your money, but ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation. It’s important to account for these factors because you cannot be sure if this trend will continue or if you are getting a good deal for the future returns you are paying for. Canadian Solar’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.

1. Future Outlook: What are well-informed industry analysts predicting for CSIQ’s future growth? Take a look at our free research report of analyst consensus for CSIQ’s outlook.
2. Valuation: What is CSIQ worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CSIQ is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.