Stock Analysis

Empresas Copec (SNSE:COPEC) Could Be Struggling To Allocate Capital

SNSE:COPEC
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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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. In light of that, when we looked at Empresas Copec (SNSE:COPEC) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Empresas Copec, this is the formula:

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

0.037 = US$826m ÷ (US$25b - US$2.8b) (Based on the trailing twelve months to December 2020).

Therefore, Empresas Copec has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 5.8%.

See our latest analysis for Empresas Copec

roce
SNSE:COPEC Return on Capital Employed May 26th 2021

Above you can see how the current ROCE for Empresas Copec compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Empresas Copec.

What Can We Tell From Empresas Copec's ROCE Trend?

In terms of Empresas Copec's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.0%, but since then they've fallen to 3.7%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Empresas Copec's ROCE

In summary, we're somewhat concerned by Empresas Copec's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 32% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Empresas Copec does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While Empresas Copec 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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