Slowing Rates Of Return At Cencosud (SNSE:CENCOSUD) Leave Little Room For Excitement

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Cencosud (SNSE:CENCOSUD) and its ROCE trend, we weren't exactly thrilled.

What is 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 Cencosud, this is the formula:

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

0.079 = CL$659b ÷ (CL$11t - CL$2.4t) (Based on the trailing twelve months to March 2021).

Thus, Cencosud has an ROCE of 7.9%. On its own, that's a low figure but it's around the 9.2% average generated by the Consumer Retailing industry.

See our latest analysis for Cencosud

Above you can see how the current ROCE for Cencosud compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Cencosud here for free.

How Are Returns Trending?

There hasn't been much to report for Cencosud's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Cencosud to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that Cencosud has been paying out a decent 33% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

The Bottom Line On Cencosud's ROCE

In a nutshell, Cencosud has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 13% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

One more thing, we've spotted 2 warning signs facing Cencosud that you might find interesting.

While Cencosud 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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