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There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in SMA Solar Technology's (ETR:S92) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for SMA Solar Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = €120m ÷ (€1.7b - €706m) (Based on the trailing twelve months to September 2024).
So, SMA Solar Technology has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 13% generated by the Semiconductor industry.
View 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're interested, you can view the analysts predictions in our free analyst report for SMA Solar Technology .
What The Trend Of ROCE Can Tell Us
The fact that SMA Solar Technology is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 12% on its capital. And unsurprisingly, like most companies trying to break into the black, SMA Solar Technology is utilizing 46% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
On a side note, SMA Solar Technology's current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
What We Can Learn From SMA Solar Technology's ROCE
Overall, SMA Solar Technology gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 61% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.