Compañía Chilena de Fósforos (SNSE:FOSFOROS) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Compañía Chilena de Fósforos (SNSE:FOSFOROS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Compañía Chilena de Fósforos:

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

0.011 = CL$1.5b ÷ (CL$167b - CL$24b) (Based on the trailing twelve months to December 2023).

So, Compañía Chilena de Fósforos has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Household Products industry average of 11%.

See 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 , check out these free graphs detailing revenue and cash flow performance of Compañía Chilena de Fósforos.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Compañía Chilena de Fósforos doesn't inspire confidence. Around five years ago the returns on capital were 3.7%, but since then they've fallen to 1.1%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

In summary, Compañía Chilena de Fósforos is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 51% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Compañía Chilena de Fósforos has the makings of a multi-bagger.

One more thing: We've identified 4 warning signs with Compañía Chilena de Fósforos (at least 2 which are a bit concerning) , and understanding them would certainly be useful.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.