Stock Analysis

Should We Be Excited About The Trends Of Returns At Echeverría Izquierdo (SNSE:EISA)?

SNSE:EISA
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Echeverría Izquierdo (SNSE:EISA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Echeverría Izquierdo:

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

0.03 = CL$6.6b ÷ (CL$395b - CL$176b) (Based on the trailing twelve months to June 2020).

So, Echeverría Izquierdo has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Construction industry average of 3.8%.

View our latest analysis for Echeverría Izquierdo

roce
SNSE:EISA Return on Capital Employed November 18th 2020

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 Echeverría Izquierdo, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at Echeverría Izquierdo, we didn't gain much confidence. To be more specific, ROCE has fallen from 5.4% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Echeverría Izquierdo's current liabilities are still rather high at 44% 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 Key Takeaway

To conclude, we've found that Echeverría Izquierdo is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 13% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One final note, you should learn about the 5 warning signs we've spotted with Echeverría Izquierdo (including 1 which is makes us a bit uncomfortable) .

While Echeverría Izquierdo 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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Find out whether Echeverría Izquierdo is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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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