Returns On Capital Are Showing Encouraging Signs At SolTech Energy Sweden (STO:SOLT)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at SolTech Energy Sweden (STO:SOLT) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for SolTech Energy Sweden:

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

0.017 = kr29m ÷ (kr2.0b - kr281m) (Based on the trailing twelve months to March 2021).

So, SolTech Energy Sweden has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Electrical industry average of 14%.

See our latest analysis for SolTech Energy Sweden

Historical performance is a great place to start when researching a stock so above you can see the gauge for SolTech Energy Sweden's ROCE against it's prior returns. If you're interested in investigating SolTech Energy Sweden's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

SolTech Energy Sweden has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.7% on its capital. In addition to that, SolTech Energy Sweden is employing 1,426% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In Conclusion...

In summary, it's great to see that SolTech Energy Sweden has managed to break into profitability and is continuing to reinvest in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 78% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

SolTech Energy Sweden does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are potentially serious...

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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