Cencosud (SNSE:CENCOSUD) Is Looking To Continue Growing Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Speaking of which, we noticed some great changes in Cencosud's (SNSE:CENCOSUD) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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 Cencosud, this is the formula:

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

0.12 = CL$1.1t ÷ (CL$12t - CL$2.8t) (Based on the trailing twelve months to September 2021).

Thus, Cencosud has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Consumer Retailing industry average of 9.4% it's much better.

See our latest analysis for Cencosud

In the above chart we have measured Cencosud's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Cencosud.

What Can We Tell From Cencosud's ROCE Trend?

Cencosud is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 70% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In Conclusion...

To bring it all together, Cencosud has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 0.5% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Like most companies, Cencosud does come with some risks, and we've found 1 warning sign that you should be aware of.

While Cencosud may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.