Solartech International Holdings' (HKG:1166) Returns On Capital Are Heading Higher

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Solartech International Holdings' (HKG:1166) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Solartech International Holdings, this is the formula:

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

0.067 = HK$106m ÷ (HK$2.0b - HK$369m) (Based on the trailing twelve months to December 2021).

Therefore, Solartech International Holdings has an ROCE of 6.7%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 8.3%.

Check out our latest analysis for Solartech International Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Solartech International Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Solartech International Holdings' ROCE Trend?

We're delighted to see that Solartech International Holdings is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 6.7%, which is always encouraging. While returns have increased, the amount of capital employed by Solartech International Holdings has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line On Solartech International Holdings' ROCE

To bring it all together, Solartech International Holdings has done well to increase the returns it's generating from its capital employed. Although the company may be facing some issues elsewhere since the stock has plunged 84% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

One more thing, we've spotted 3 warning signs facing Solartech International Holdings that you might find interesting.

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.