Is Compañía Electro Metalúrgica (SNSE:ELECMETAL) Likely To Turn Things Around?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. In light of that, when we looked at Compañía Electro Metalúrgica (SNSE:ELECMETAL) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

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 Electro Metalúrgica, this is the formula:

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

0.068 = CL$68b ÷ (CL$1.3t - CL$266b) (Based on the trailing twelve months to September 2020).

Thus, Compañía Electro Metalúrgica has an ROCE of 6.8%. Even though it's in line with the industry average of 6.8%, it's still a low return by itself.

Check out our latest analysis for Compañía Electro Metalúrgica

Historical performance is a great place to start when researching a stock so above you can see the gauge for Compañía Electro Metalúrgica's ROCE against it's prior returns. If you're interested in investigating Compañía Electro Metalúrgica's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Compañía Electro Metalúrgica's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.8% from 10% five years ago. However it looks like Compañía Electro Metalúrgica 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 may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Compañía Electro Metalúrgica's ROCE

To conclude, we've found that Compañía Electro Metalúrgica 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 16% 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.

Compañía Electro Metalúrgica does have some risks, we noticed 3 warning signs (and 2 which are significant) we think you should know about.

While Compañía Electro Metalúrgica 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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