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

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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.

Solaria Energía y Medio Ambiente's Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Solaria Energía y Medio Ambiente has total assets of €397m and current liabilities of €13m. As a result, its current liabilities are equal to approximately 3.3% of its total assets. Solaria Energía y Medio Ambiente has a low level of current liabilities, which have a negligible impact on its already low ROCE.

The Bottom Line On Solaria Energía y Medio Ambiente's ROCE

Still, investors could probably find more attractive prospects with better performance out there. Of course, you might also be able to find a better stock than Solaria Energía y Medio Ambiente. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.