Solaria Energía y Medio Ambiente (BME:SLR) Shareholders Will Want The ROCE Trajectory To Continue

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at Solaria Energía y Medio Ambiente (BME:SLR) and its trend of ROCE, we really liked what we saw.

What Is 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)

0.11 = €160m ÷ (€1.6b - €188m) (Based on the trailing twelve months to September 2023).

Therefore, 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%.

View 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Solaria Energía y Medio Ambiente's ROCE Trending?

The trends we've noticed at Solaria Energía y Medio Ambiente are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 271% more capital is being employed now too. So we're very much inspired by what we're seeing at Solaria Energía y Medio Ambiente thanks to its ability to profitably reinvest capital.

The Key Takeaway

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. And a remarkable 140% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Solaria Energía y Medio Ambiente does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

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. 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.