Returns On Capital Are Showing Encouraging Signs At Solaria Energía y Medio Ambiente (BME:SLR)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Solaria Energía y Medio Ambiente, this is the formula:

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

0.098 = €122m ÷ (€1.4b - €185m) (Based on the trailing twelve months to December 2022).

Thus, Solaria Energía y Medio Ambiente has an ROCE of 9.8%. In absolute terms, that's a low return, but it's much better than the Renewable Energy industry average of 7.7%.

View 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.

How Are Returns Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 9.8%. The amount of capital employed has increased too, by 365%. 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.

In Conclusion...

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 with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Solaria Energía y Medio Ambiente can keep these trends up, it could have a bright future ahead.

If you want to continue researching Solaria Energía y Medio Ambiente, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.