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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Canadian Solar (NASDAQ:CSIQ) 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 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. To calculate this metric for Canadian Solar, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.015 = US$115m ÷ (US$14b - US$6.0b) (Based on the trailing twelve months to September 2024).
Thus, Canadian Solar has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 8.6%.
See our latest analysis for Canadian Solar
In the above chart we have measured Canadian Solar's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Canadian Solar for free.
What Can We Tell From Canadian Solar's ROCE Trend?
The trend of ROCE doesn't look fantastic because it's fallen from 13% five years ago, while the business's capital employed increased by 248%. Usually this isn't ideal, but given Canadian Solar conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Canadian Solar might not have received a full period of earnings contribution from it.
On a side note, Canadian Solar has done well to pay down its current liabilities to 44% 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. 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 44% is still pretty high, so those risks are still somewhat prevalent.