Compañía Agropecuaria Copeval's (SNSE:COPEVAL) Returns On Capital Tell Us There Is Reason To Feel Uneasy

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Compañía Agropecuaria Copeval (SNSE:COPEVAL), we weren't too hopeful.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Compañía Agropecuaria Copeval, this is the formula:

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

0.094 = CL$14b ÷ (CL$286b - CL$137b) (Based on the trailing twelve months to December 2020).

Therefore, Compañía Agropecuaria Copeval has an ROCE of 9.4%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 13%.

See our latest analysis for Compañía Agropecuaria Copeval

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Compañía Agropecuaria Copeval, check out these free graphs here.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Compañía Agropecuaria Copeval. About five years ago, returns on capital were 14%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Compañía Agropecuaria Copeval to turn into a multi-bagger.

On a related note, Compañía Agropecuaria Copeval has decreased its current liabilities to 48% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 48% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Compañía Agropecuaria Copeval's ROCE

In summary, it's unfortunate that Compañía Agropecuaria Copeval is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 35% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Compañía Agropecuaria Copeval does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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