To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Viña San Pedro Tarapacá’s (SNSE:VSPT) trend of ROCE, we liked what we saw.
Return On Capital Employed (ROCE): What is it?
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 Viña San Pedro Tarapacá:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.11 = CL$38b ÷ (CL$439b – CL$110b) (Based on the trailing twelve months to June 2020).
So, Viña San Pedro Tarapacá has an ROCE of 11%. On its own, that’s a standard return, however it’s much better than the 9.0% generated by the Beverage industry.
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’d like to look at how Viña San Pedro Tarapacá has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
While the returns on capital are good, they haven’t moved much. Over the past five years, ROCE has remained relatively flat at around 11% and the business has deployed 37% more capital into its operations. 11% is a pretty standard return, and it provides some comfort knowing that Viña San Pedro Tarapacá has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
In the end, Viña San Pedro Tarapacá has proven its ability to adequately reinvest capital at good rates of return. Therefore it’s no surprise that shareholders have earned a respectable 73% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
One final note, you should learn about the 3 warning signs we’ve spotted with Viña San Pedro Tarapacá (including 1 which is shouldn’t be ignored) .
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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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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