Today we'll look at Solarpack Corporacion Tecnologica, S.A. (BME:SPK) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Solarpack Corporacion Tecnologica:

0.016 = €8.9m ÷ (€690m - €140m) (Based on the trailing twelve months to September 2019.)

So, Solarpack Corporacion Tecnologica has an ROCE of 1.6%.

Check out our latest analysis for Solarpack Corporacion Tecnologica

Is Solarpack Corporacion Tecnologica's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Solarpack Corporacion Tecnologica's ROCE appears meaningfully below the 4.1% average reported by the Renewable Energy industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Solarpack Corporacion Tecnologica's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.

Solarpack Corporacion Tecnologica's current ROCE of 1.6% is lower than 3 years ago, when the company reported a 31% ROCE. Therefore we wonder if the company is facing new headwinds. The image below shows how Solarpack Corporacion Tecnologica's ROCE compares to its industry, and you can click it to see more detail on its past growth.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Solarpack Corporacion Tecnologica.