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There are a few key trends to look for if we want to identify the next 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at 7C Solarparken (ETR:HRPK), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
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 7C Solarparken, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = €25m ÷ (€564m - €50m) (Based on the trailing twelve months to December 2023).
So, 7C Solarparken has an ROCE of 4.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.5%.
View our latest analysis for 7C Solarparken
Above you can see how the current ROCE for 7C Solarparken compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for 7C Solarparken .
What The Trend Of ROCE Can Tell Us
There are better returns on capital out there than what we're seeing at 7C Solarparken. The company has consistently earned 4.8% for the last five years, and the capital employed within the business has risen 62% 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.
The Key Takeaway
Long story short, while 7C Solarparken has been reinvesting its capital, the returns that it's generating haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 18% in the last five years. Therefore based on the analysis done in this article, we don't think 7C Solarparken has the makings of a multi-bagger.
One more thing, we've spotted 3 warning signs facing 7C Solarparken that you might find interesting.
While 7C Solarparken 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.