There Are Reasons To Feel Uneasy About Solex Energy's (NSE:SOLEX) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Solex Energy (NSE:SOLEX) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Solex Energy:

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

0.10 = ₹90m ÷ (₹1.4b - ₹545m) (Based on the trailing twelve months to March 2023).

So, Solex Energy has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 5.3% generated by the Semiconductor industry.

View our latest analysis for Solex Energy

Historical performance is a great place to start when researching a stock so above you can see the gauge for Solex Energy's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Solex Energy, check out these free graphs here.

So How Is Solex Energy's ROCE Trending?

In terms of Solex Energy's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 10% from 30% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Solex Energy has done well to pay down its current liabilities to 39% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Solex Energy. And the stock has done incredibly well with a 1,653% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Solex Energy does come with some risks though, we found 5 warning signs in our investment analysis, and 3 of those are a bit concerning...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.