In This Article:
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in SMA Solar Technology's (ETR:S92) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for SMA Solar Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = €263m ÷ (€1.7b - €659m) (Based on the trailing twelve months to March 2024).
Thus, SMA Solar Technology has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 15%.
See our latest analysis for SMA Solar Technology
Above you can see how the current ROCE for SMA Solar Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering SMA Solar Technology for free.
What Does the ROCE Trend For SMA Solar Technology Tell Us?
SMA Solar Technology has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 26% on its capital. In addition to that, SMA Solar Technology is employing 47% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In Conclusion...
Long story short, we're delighted to see that SMA Solar Technology's reinvestment activities have paid off and the company is now profitable. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 11% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
On a separate note, we've found 3 warning signs for SMA Solar Technology you'll probably want to know about.