Will Solaria Energía y Medio Ambiente (BME:SLR) Multiply In Value Going Forward?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Solaria Energía y Medio Ambiente (BME:SLR), it didn't seem to tick all of these boxes.

What is 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. 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)

0.044 = €27m ÷ (€659m - €54m) (Based on the trailing twelve months to September 2020).

So, Solaria Energía y Medio Ambiente has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 6.3%.

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

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

There are better returns on capital out there than what we're seeing at Solaria Energía y Medio Ambiente. The company has consistently earned 4.4% for the last five years, and the capital employed within the business has risen 431% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Solaria Energía y Medio Ambiente has done well to reduce current liabilities to 8.3% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Solaria Energía y Medio Ambiente's ROCE

In conclusion, Solaria Energía y Medio Ambiente has been investing more capital into the business, but returns on that capital haven't increased. Yet to long term shareholders the stock has gifted them an incredible 2,503% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Solaria Energía y Medio Ambiente does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Solaria Energía y Medio Ambiente may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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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