Returns On Capital At Quiñenco (SNSE:QUINENCO) Have Hit The Brakes

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Quiñenco (SNSE:QUINENCO), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Quiñenco, this is the formula:

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

0.034 = CL$717b ÷ (CL$52t - CL$31t) (Based on the trailing twelve months to March 2021).

So, Quiñenco has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Industrials industry average of 4.9%.

View our latest analysis for Quiñenco

Historical performance is a great place to start when researching a stock so above you can see the gauge for Quiñenco's ROCE against it's prior returns. If you'd like to look at how Quiñenco has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Quiñenco's ROCE Trend?

The returns on capital haven't changed much for Quiñenco in recent years. Over the past five years, ROCE has remained relatively flat at around 3.4% and the business has deployed 42% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Quiñenco's current liabilities are still rather high at 60% 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 On Quiñenco's ROCE

As we've seen above, Quiñenco's returns on capital haven't increased but it is reinvesting in the business. And investors may be recognizing these trends since the stock has only returned a total of 31% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know more about Quiñenco, we've spotted 2 warning signs, and 1 of them can't be ignored.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
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