Here's What's Concerning About Empresas Lipigas' (SNSE:LIPIGAS) Returns On Capital

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after investigating Empresas Lipigas (SNSE:LIPIGAS), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Empresas Lipigas:

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

0.13 = CL$61b ÷ (CL$559b - CL$71b) (Based on the trailing twelve months to December 2020).

Therefore, Empresas Lipigas has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 5.3% it's much better.

View our latest analysis for Empresas Lipigas

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Empresas Lipigas, check out these free graphs here.

So How Is Empresas Lipigas' ROCE Trending?

In terms of Empresas Lipigas' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 13% from 21% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Empresas Lipigas' ROCE

In summary, Empresas Lipigas is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Additionally, the stock's total return to shareholders over the last three years has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Empresas Lipigas does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Empresas Lipigas 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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