Be Wary Of Cementos Bio Bio (SNSE:CEMENTOS) And Its Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Cementos Bio Bio (SNSE:CEMENTOS), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for Cementos Bio Bio:

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

0.048 = CL$18b ÷ (CL$443b - CL$60b) (Based on the trailing twelve months to September 2020).

So, Cementos Bio Bio has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 6.5%.

See our latest analysis for Cementos Bio Bio

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cementos Bio Bio's ROCE against it's prior returns. If you'd like to look at how Cementos Bio Bio has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Cementos Bio Bio. About five years ago, returns on capital were 7.3%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Cementos Bio Bio to turn into a multi-bagger.

What We Can Learn From Cementos Bio Bio's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. However the stock has delivered a 90% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Cementos Bio Bio does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Cementos Bio Bio 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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