Will Canadian Solar (NASDAQ:CSIQ) Multiply In Value Going Forward?
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Canadian Solar (NASDAQ:CSIQ) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Canadian Solar, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$372m ÷ (US$5.3b - US$2.8b) (Based on the trailing twelve months to June 2020).
Thus, Canadian Solar has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Semiconductor industry.
View 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'd like to see what analysts are forecasting going forward, you should check out our free report for Canadian Solar.
What Can We Tell From Canadian Solar's ROCE Trend?
The trend of ROCE doesn't look fantastic because it's fallen from 27% five years ago, while the business's capital employed increased by 75%. That being said, Canadian Solar raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Canadian Solar might not have received a full period of earnings contribution from it.
On a side note, Canadian Solar's current liabilities are still rather high at 53% 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Canadian Solar's ROCE
To conclude, we've found that Canadian Solar is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 85% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Canadian Solar (of which 1 is potentially serious!) that you should know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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. 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.
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