Solaria Energía y Medio Ambiente (BME:SLR) Might Have The Makings Of A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 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)

0.085 = €139m ÷ (€1.8b - €211m) (Based on the trailing twelve months to September 2024).

Therefore, Solaria Energía y Medio Ambiente has an ROCE of 8.5%. Even though it's in line with the industry average of 8.5%, it's still a low return by itself.

Check out 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, you can check out the forecasts from the analysts covering Solaria Energía y Medio Ambiente for free.

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

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 8.5%. The amount of capital employed has increased too, by 249%. 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.

What We Can Learn From Solaria Energía y Medio Ambiente's ROCE

All in all, it's terrific to see that Solaria Energía y Medio Ambiente is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 16% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing: We've identified 2 warning signs with Solaria Energía y Medio Ambiente (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.