Stock Analysis

Will Empresas Copec (SNSE:COPEC) Multiply In Value Going Forward?

SNSE:COPEC
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There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Empresas Copec (SNSE:COPEC) 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)?

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)

0.028 = US$615m ÷ (US$25b - US$2.5b) (Based on the trailing twelve months to September 2020).

Therefore, Empresas Copec has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 6.4%.

View our latest analysis for Empresas Copec

roce
SNSE:COPEC Return on Capital Employed December 17th 2020

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, you can check out the forecasts from the analysts covering Empresas Copec here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Empresas Copec doesn't inspire confidence. Around five years ago the returns on capital were 6.9%, but since then they've fallen to 2.8%. And considering revenue has dropped while employing more capital, we'd be cautious. 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

We're a bit apprehensive about Empresas Copec because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors must expect better things on the horizon though because the stock has risen 21% 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 have some risks though, and we've spotted 1 warning sign for Empresas Copec that you might be interested in.

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. 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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