Investors Will Want Solaria Energía y Medio Ambiente's (BME:SLR) Growth In ROCE To Persist

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. Speaking of which, we noticed some great changes in Solaria Energía y Medio Ambiente's (BME:SLR) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Solaria Energía y Medio Ambiente:

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

0.064 = €52m ÷ (€976m - €161m) (Based on the trailing twelve months to June 2021).

Therefore, Solaria Energía y Medio Ambiente has an ROCE of 6.4%. In absolute terms, that's a low return, but it's much better than the Renewable Energy industry average of 4.5%.

See our latest analysis for Solaria Energía y Medio Ambiente

In the above chart we have measured Solaria Energía y Medio Ambiente's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Solaria Energía y Medio Ambiente.

What Does the ROCE Trend For Solaria Energía y Medio Ambiente Tell Us?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 6.4%. The amount of capital employed has increased too, by 424%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line On Solaria Energía y Medio Ambiente's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Solaria Energía y Medio Ambiente has. And a remarkable 1,952% 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.

Solaria Energía y Medio Ambiente does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

While Solaria Energía y Medio Ambiente 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.