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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating 7C Solarparken (ETR:HRPK), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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)
0.031 = €15m ÷ (€540m - €66m) (Based on the trailing twelve months to June 2024).
Therefore, 7C Solarparken has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 6.1%.
Check out 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're interested, you can view the analysts predictions in our free analyst report for 7C Solarparken .
What Does the ROCE Trend For 7C Solarparken Tell Us?
In terms of 7C Solarparken's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 4.1%, but since then they've fallen to 3.1%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Bottom Line
In summary, we're somewhat concerned by 7C Solarparken's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 42% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you'd like to know more about 7C Solarparken, we've spotted 4 warning signs, and 1 of them shouldn't be ignored.
While 7C Solarparken isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.