The Returns On Capital At Compañía Electro Metalúrgica (SNSE:ELECMETAL) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Compañía Electro Metalúrgica (SNSE:ELECMETAL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. Analysts use this formula to calculate it for Compañía Electro Metalúrgica:

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

0.056 = CL$55b ÷ (CL$1.2t - CL$184b) (Based on the trailing twelve months to March 2021).

So, Compañía Electro Metalúrgica has an ROCE of 5.6%. In absolute terms, that's a low return but it's around the Industrials industry average of 4.9%.

See our latest analysis for Compañía Electro Metalúrgica

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 Electro Metalúrgica, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Compañía Electro Metalúrgica's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 10%, but since then they've fallen to 5.6%. 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Compañía Electro Metalúrgica's ROCE

To conclude, we've found that Compañía Electro Metalúrgica is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 62% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we found 3 warning signs for Compañía Electro Metalúrgica (2 are a bit concerning) you should be aware of.

While Compañía Electro Metalúrgica 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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