Capital Allocation Trends At Cementos Bio Bio (SNSE:CEMENTOS) Aren't Ideal

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Cementos Bio Bio (SNSE:CEMENTOS), so let's see why.

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. The formula for this calculation on Cementos Bio Bio is:

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

0.063 = CL$24b ÷ (CL$444b - CL$57b) (Based on the trailing twelve months to March 2021).

Thus, Cementos Bio Bio has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 10%.

See our latest analysis for Cementos Bio Bio

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 Cementos Bio Bio, check out these free graphs here.

The Trend Of ROCE

There is reason to be cautious about Cementos Bio Bio, given the returns are trending downwards. About five years ago, returns on capital were 8.7%, 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. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Cementos Bio Bio becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Cementos Bio Bio is generating lower returns from the same amount of capital. However the stock has delivered a 49% 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.

If you'd like to know more about Cementos Bio Bio, we've spotted 3 warning signs, and 1 of them is potentially serious.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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