Capital Allocation Trends At Empresas CMPC (SNSE:CMPC) Aren't Ideal

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Empresas CMPC (SNSE:CMPC), 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. 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)

0.022 = US$342m ÷ (US$17b - US$1.7b) (Based on the trailing twelve months to June 2024).

Therefore, Empresas CMPC has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 6.7%.

Check out 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're interested, you can view the analysts predictions in our free analyst report for Empresas CMPC .

So How Is Empresas CMPC's ROCE Trending?

We are a bit worried about the trend of returns on capital at Empresas CMPC. Unfortunately the returns on capital have diminished from the 5.4% 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. 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 Empresas CMPC to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Empresas CMPC is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 25% 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.

One more thing: We've identified 4 warning signs with Empresas CMPC (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

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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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.