What Do The Returns On Capital At Empresas Lipigas (SNSE:LIPIGAS) Tell Us?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Empresas Lipigas (SNSE:LIPIGAS) and its ROCE trend, we weren't exactly thrilled.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Empresas Lipigas, this is the formula:

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

0.13 = CL$64b ÷ (CL$569b - CL$80b) (Based on the trailing twelve months to September 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 7.1% it's much better.

View our latest analysis for Empresas Lipigas

Historical performance is a great place to start when researching a stock so above you can see the gauge for Empresas Lipigas' ROCE against it's prior returns. 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?

When we looked at the ROCE trend at Empresas Lipigas, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 18% 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 may take some time before the company starts to see any change in earnings from these investments.

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. Unsurprisingly then, the total return to shareholders over the last three years has been flat. 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.

Like most companies, Empresas Lipigas does come with some risks, and we've found 2 warning signs that you should be aware of.

While Empresas Lipigas 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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