Investors Will Want Solvac's (EBR:SOLV) Growth In ROCE To Persist

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Solvac (EBR:SOLV) looks quite promising in regards to its trends of return on capital.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Solvac is:

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

0.11 = €408m ÷ (€3.8b - €5.0m) (Based on the trailing twelve months to June 2023).

Thus, Solvac has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.

See our latest analysis for Solvac

Historical performance is a great place to start when researching a stock so above you can see the gauge for Solvac's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Solvac, check out these free graphs here.

What Does the ROCE Trend For Solvac Tell Us?

Solvac has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 52% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Key Takeaway

To bring it all together, Solvac has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 21% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

On a final note, we've found 1 warning sign for Solvac that we think you should be aware of.

While Solvac may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.