- India
- /
- Semiconductors
- /
- NSEI:SOLEX
Some Investors May Be Worried About Solex Energy's (NSE:SOLEX) Returns On Capital
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Solex Energy (NSE:SOLEX), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
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. To calculate this metric for Solex Energy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = ₹368m ÷ (₹3.0b - ₹1.3b) (Based on the trailing twelve months to September 2024).
Thus, Solex Energy has an ROCE of 22%. In absolute terms that's a very respectable return and compared to the Semiconductor industry average of 26% it's pretty much on par.
View our latest analysis for Solex Energy
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'd like to look at how Solex Energy has performed in the past in other metrics, you can view this free graph of Solex Energy's past earnings, revenue and cash flow.
How Are Returns Trending?
The trend of ROCE doesn't look fantastic because it's fallen from 34% five years ago, while the business's capital employed increased by 587%. That being said, Solex Energy raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Solex Energy's earnings and if they change as a result from the capital raise.
On a side note, Solex Energy has done well to pay down its current liabilities to 43% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 43% is still pretty high, so those risks are still somewhat prevalent.
In Conclusion...
In summary, despite lower returns in the short term, we're encouraged to see that Solex Energy is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 3,067% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.
If you'd like to know more about Solex Energy, we've spotted 4 warning signs, and 2 of them are potentially serious.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About NSEI:SOLEX
Proven track record slight.
Similar Companies
Market Insights
Community Narratives


