Socovesa (SNSE:SOCOVESA) Will Want To Turn Around Its Return Trends

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Socovesa (SNSE:SOCOVESA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Socovesa is:

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

0.076 = CL$31b ÷ (CL$1.0t - CL$597b) (Based on the trailing twelve months to June 2021).

Thus, Socovesa has an ROCE of 7.6%. Even though it's in line with the industry average of 7.6%, it's still a low return by itself.

View our latest analysis for Socovesa

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

So How Is Socovesa's ROCE Trending?

When we looked at the ROCE trend at Socovesa, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 7.6%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a separate but related note, it's important to know that Socovesa has a current liabilities to total assets ratio of 59%, which we'd consider pretty high. 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.

What We Can Learn From Socovesa's ROCE

We're a bit apprehensive about Socovesa because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 16% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 5 warning signs with Socovesa (at least 2 which are a bit concerning) , and understanding them would certainly be useful.

While Socovesa 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. 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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