Returns On Capital At SolTech Energy Sweden (STO:SOLT) Have Hit The Brakes

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think SolTech Energy Sweden (STO:SOLT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for SolTech Energy Sweden, this is the formula:

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

0.025 = kr38m ÷ (kr2.5b - kr1.0b) (Based on the trailing twelve months to March 2024).

Therefore, SolTech Energy Sweden has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Electrical industry average of 12%.

Check out 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'd like to look at how SolTech Energy Sweden has performed in the past in other metrics, you can view this free graph of SolTech Energy Sweden's past earnings, revenue and cash flow.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at SolTech Energy Sweden. The company has consistently earned 2.5% for the last five years, and the capital employed within the business has risen 91% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a separate but related note, it's important to know that SolTech Energy Sweden has a current liabilities to total assets ratio of 40%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, SolTech Energy Sweden has simply been reinvesting capital and generating the same low rate of return as before. Moreover, since the stock has crumbled 78% over the last five years, it appears investors are expecting the worst. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing: We've identified 3 warning signs with SolTech Energy Sweden (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

While SolTech Energy Sweden may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com