Be Wary Of Empresas CMPC (SNSE:CMPC) And Its Returns On Capital

What financial metrics can indicate to us that a company is maturing or even 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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Empresas CMPC (SNSE:CMPC), we weren't too upbeat about how things were going.

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. To calculate this metric for Empresas CMPC, this is the formula:

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

0.018 = US$242m ÷ (US$15b - US$1.1b) (Based on the trailing twelve months to March 2021).

So, Empresas CMPC has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 6.2%.

View our latest analysis for Empresas CMPC

In the above chart we have measured Empresas CMPC's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Empresas CMPC here for free.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Empresas CMPC. Unfortunately the returns on capital have diminished from the 2.9% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Empresas CMPC to turn into a multi-bagger.

What We Can Learn From Empresas CMPC's 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. Investors must expect better things on the horizon though because the stock has risen 21% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Empresas CMPC (of which 2 shouldn't be ignored!) that you should know about.

While Empresas CMPC 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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