Returns On Capital Are A Standout For Solargiga Energy Holdings (HKG:757)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Solargiga Energy Holdings (HKG:757) looks great, so lets see what the trend can tell us.

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 Solargiga Energy Holdings, this is the formula:

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

0.23 = CN¥424m ÷ (CN¥7.0b - CN¥5.2b) (Based on the trailing twelve months to June 2022).

Therefore, Solargiga Energy Holdings has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 14%.

Our analysis indicates that 757 is potentially undervalued!

Historical performance is a great place to start when researching a stock so above you can see the gauge for Solargiga Energy Holdings' ROCE against it's prior returns. If you'd like to look at how Solargiga Energy Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Solargiga Energy Holdings Tell Us?

Investors would be pleased with what's happening at Solargiga Energy Holdings. The data shows that returns on capital have increased substantially over the last five years to 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 45% more capital is being employed now too. 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.

Another thing to note, Solargiga Energy Holdings has a high ratio of current liabilities to total assets of 74%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

To sum it up, Solargiga Energy Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Astute investors may have an opportunity here because the stock has declined 28% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we've found 1 warning sign for Solargiga Energy Holdings that we think you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.