What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in 7C Solarparken's (ETR:HRPK) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on 7C Solarparken is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.036 = €15m ÷ (€449m - €35m) (Based on the trailing twelve months to June 2020).
Thus, 7C Solarparken has an ROCE of 3.6%. Even though it's in line with the industry average of 4.1%, it's still a low return by itself.
See our latest analysis for 7C Solarparken
Above you can see how the current ROCE for 7C Solarparken compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for 7C Solarparken.
How Are Returns Trending?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 3.6%. The amount of capital employed has increased too, by 125%. So we're very much inspired by what we're seeing at 7C Solarparken thanks to its ability to profitably reinvest capital.
What We Can Learn From 7C Solarparken's ROCE
All in all, it's terrific to see that 7C Solarparken is reaping the rewards from prior investments and is growing its capital base. And a remarkable 110% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
One final note, you should learn about the 3 warning signs we've spotted with 7C Solarparken (including 1 which is is a bit concerning) .
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.
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This article by Simply Wall St is general in nature. 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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About XTRA:HRPK
Slight with moderate growth potential.
