Do Solaria Energía y Medio Ambiente, S.A.’s (BME:SLR) Returns On Capital Employed Make The Cut?

Simply Wall St

Tue, Jul 9, 2019, 11:47 PM

Today we are going to look at Solaria Energía y Medio Ambiente, S.A. (BME:SLR) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

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

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for Solaria Energía y Medio Ambiente:

0.039 = €15m ÷ (€397m - €13m) (Based on the trailing twelve months to March 2019.)

So, Solaria Energía y Medio Ambiente has an ROCE of 3.9%.

Check out our latest analysis for Solaria Energía y Medio Ambiente

Does Solaria Energía y Medio Ambiente Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Solaria Energía y Medio Ambiente's ROCE appears to be around the 3.9% average of the Renewable Energy industry. Regardless of how Solaria Energía y Medio Ambiente stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.

We can see that , Solaria Energía y Medio Ambiente currently has an ROCE of 3.9% compared to its ROCE 3 years ago, which was 0.5%. This makes us wonder if the company is improving. You can see in the image below how Solaria Energía y Medio Ambiente's ROCE compares to its industry. Click to see more on past growth.

BME:SLR Past Revenue and Net Income, July 10th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Solaria Energía y Medio Ambiente.