Empresa Constructora Moller y Pérez Cotapos' (SNSE:MOLLER) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Empresa Constructora Moller y Pérez Cotapos (SNSE:MOLLER) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Empresa Constructora Moller y Pérez Cotapos is:

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

0.035 = CL$5.9b ÷ (CL$386b - CL$216b) (Based on the trailing twelve months to September 2021).

Therefore, Empresa Constructora Moller y Pérez Cotapos has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.6%.

Check out our latest analysis for Empresa Constructora Moller y Pérez Cotapos

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Empresa Constructora Moller y Pérez Cotapos, we didn't gain much confidence. To be more specific, ROCE has fallen from 4.6% over the last five years. However it looks like Empresa Constructora Moller y Pérez Cotapos 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.

On a side note, Empresa Constructora Moller y Pérez Cotapos' current liabilities are still rather high at 56% 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.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Empresa Constructora Moller y Pérez Cotapos' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 46% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing Empresa Constructora Moller y Pérez Cotapos we've found 3 warning signs (2 can't be ignored!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.