Compañía Chilena de Fósforos (SNSE:FOSFOROS) May Have Issues Allocating Its Capital

What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Compañía Chilena de Fósforos (SNSE:FOSFOROS), we weren't too upbeat about how things were going.

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

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 Compañía Chilena de Fósforos, this is the formula:

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

0.029 = CL$2.1b ÷ (CL$81b - CL$8.7b) (Based on the trailing twelve months to December 2020).

So, Compañía Chilena de Fósforos has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Household Products industry average of 16%.

View our latest analysis for Compañía Chilena de Fósforos

Historical performance is a great place to start when researching a stock so above you can see the gauge for Compañía Chilena de Fósforos' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Compañía Chilena de Fósforos, check out these free graphs here.

The Trend Of ROCE

There is reason to be cautious about Compañía Chilena de Fósforos, given the returns are trending downwards. To be more specific, the ROCE was 4.4% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Compañía Chilena de Fósforos to turn into a multi-bagger.

The Bottom Line On Compañía Chilena de Fósforos' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. In spite of that, the stock has delivered a 25% return to shareholders who held over 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.

If you want to know some of the risks facing Compañía Chilena de Fósforos we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Compañía Chilena de Fósforos 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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