Solaria Energía y Medio Ambiente's (BME:SLR) Returns On Capital Are Heading Higher

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. 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.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.054 = €34m ÷ (€716m - €86m) (Based on the trailing twelve months to December 2020).

So, Solaria Energía y Medio Ambiente has an ROCE of 5.4%. Even though it's in line with the industry average of 5.1%, it's still a low return by itself.

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

What Can We Tell From Solaria Energía y Medio Ambiente's ROCE Trend?

We're delighted to see that Solaria Energía y Medio Ambiente is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 5.4% on its capital. Not only that, but the company is utilizing 365% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

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

To the delight of most shareholders, Solaria Energía y Medio Ambiente has now broken into profitability. And a remarkable 2,511% 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.

If you'd like to know more about Solaria Energía y Medio Ambiente, we've spotted 3 warning signs, and 2 of them don't sit too well with us.

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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