Returns At Solaria Energía y Medio Ambiente (BME:SLR) Are On The Way Up

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Solaria Energía y Medio Ambiente (BME:SLR) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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 Solaria Energía y Medio Ambiente is:

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

0.11 = €169m ÷ (€1.7b - €189m) (Based on the trailing twelve months to March 2024).

Thus, Solaria Energía y Medio Ambiente has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Renewable Energy industry average of 9.5%.

See our latest analysis for Solaria Energía y Medio Ambiente

Above you can see how the current ROCE for Solaria Energía y Medio Ambiente 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 analyst report for Solaria Energía y Medio Ambiente .

The Trend Of ROCE

Solaria Energía y Medio Ambiente is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 11%. The amount of capital employed has increased too, by 289%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On Solaria Energía y Medio Ambiente's ROCE

In summary, it's great to see that Solaria Energía y Medio Ambiente can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 176% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Solaria Energía y Medio Ambiente does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

While Solaria Energía y Medio Ambiente isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

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