The Trends At Compañía Electro Metalúrgica (SNSE:ELECMETAL) That You Should Know About

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Compañía Electro Metalúrgica (SNSE:ELECMETAL) 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?

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 Compañía Electro Metalúrgica:

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).

Therefore, 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.

View 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'd like to look at how Compañía Electro Metalúrgica has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Compañía Electro Metalúrgica doesn't inspire confidence. 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.

The Bottom Line On Compañía Electro Metalúrgica's ROCE

In summary, Compañía Electro Metalúrgica is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 48% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

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

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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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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