Empresas CMPC (SNSE:CMPC) Is Experiencing Growth In Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Speaking of which, we noticed some great changes in Empresas CMPC's (SNSE:CMPC) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Empresas CMPC is:

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

0.072 = US$986m ÷ (US$16b - US$2.1b) (Based on the trailing twelve months to March 2022).

So, Empresas CMPC has an ROCE of 7.2%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 15%.

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'd like, you can check out the forecasts from the analysts covering Empresas CMPC here for free.

So How Is Empresas CMPC's ROCE Trending?

Shareholders will be relieved that Empresas CMPC has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 7.2% on its capital. While returns have increased, the amount of capital employed by Empresas CMPC has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Bottom Line

To bring it all together, Empresas CMPC has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 7.3% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Empresas CMPC does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.