Stock Analysis

The Trends At Echeverría Izquierdo (SNSE:EISA) That You Should Know About

SNSE:EISA
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Echeverría Izquierdo (SNSE:EISA), it didn't seem to tick all of these boxes.

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

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

0.025 = CL$5.4b ÷ (CL$400b - CL$185b) (Based on the trailing twelve months to September 2020).

So, Echeverría Izquierdo has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 3.8%.

View our latest analysis for Echeverría Izquierdo

roce
SNSE:EISA Return on Capital Employed February 22nd 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Echeverría Izquierdo's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Echeverría Izquierdo, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Echeverría Izquierdo's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.5% from 4.7% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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 46% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In summary, Echeverría Izquierdo is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 12% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Echeverría Izquierdo does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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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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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