There Are Reasons To Feel Uneasy About Viña San Pedro Tarapacá's (SNSE:VSPT) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Viña San Pedro Tarapacá (SNSE:VSPT), we don't think it's current trends fit the mold of a multi-bagger.

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

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. The formula for this calculation on Viña San Pedro Tarapacá is:

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

0.09 = CL$29b ÷ (CL$426b - CL$99b) (Based on the trailing twelve months to December 2020).

Therefore, Viña San Pedro Tarapacá has an ROCE of 9.0%. In absolute terms, that's a low return but it's around the Beverage industry average of 11%.

Check out our latest analysis for Viña San Pedro Tarapacá

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 Viña San Pedro Tarapacá, check out these free graphs here.

So How Is Viña San Pedro Tarapacá's ROCE Trending?

When we looked at the ROCE trend at Viña San Pedro Tarapacá, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.0% from 14% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

While returns have fallen for Viña San Pedro Tarapacá in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 42% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Viña San Pedro Tarapacá does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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