Yahoo Finance Investors Could Be Concerned With Canadian Solar's (NASDAQ:CSIQ) Returns On Capital
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Canadian Solar (NASDAQ:CSIQ), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Canadian Solar is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.075 = US$453m ÷ (US$12b - US$5.9b) (Based on the trailing twelve months to December 2023).
Thus, Canadian Solar has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 9.7%.
See our latest analysis for Canadian Solar
In the above chart we have measured Canadian Solar's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Canadian Solar .
What The Trend Of ROCE Can Tell Us
We weren't thrilled with the trend because Canadian Solar's ROCE has reduced by 60% over the last five years, while the business employed 210% more capital. Usually this isn't ideal, but given Canadian Solar conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Canadian Solar probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. Additionally, we found that Canadian Solar's most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.
On a side note, Canadian Solar has done well to pay down its current liabilities to 49% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 49% is still pretty high, so those risks are still somewhat prevalent.
The Bottom Line
In summary, Canadian Solar is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 1.6% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you want to continue researching Canadian Solar, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Canadian Solar may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
