Some Investors May Be Worried About Echeverría Izquierdo's (SNSE:EISA) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Echeverría Izquierdo (SNSE:EISA), 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 Echeverría Izquierdo is:

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

0.033 = CL$6.5b ÷ (CL$403b - CL$203b) (Based on the trailing twelve months to March 2021).

Thus, Echeverría Izquierdo has an ROCE of 3.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.3%.

See our latest analysis for Echeverría Izquierdo

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.

What Can We Tell From Echeverría Izquierdo's ROCE Trend?

On the surface, the trend of ROCE at Echeverría Izquierdo doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.3% from 5.1% five years ago. However it looks like Echeverría Izquierdo might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Echeverría Izquierdo's current liabilities are still rather high at 50% 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.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Echeverría Izquierdo's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 3.6% 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.

One more thing: We've identified 4 warning signs with Echeverría Izquierdo (at least 1 which is significant) , and understanding these would certainly be useful.

While Echeverría Izquierdo isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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