Investors Could Be Concerned With Envases del Pacifico's (SNSE:EDELPA) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Envases del Pacifico (SNSE:EDELPA), so let's see why.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Envases del Pacifico, this is the formula:

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

0.012 = CL$428m ÷ (CL$55b - CL$18b) (Based on the trailing twelve months to June 2023).

Thus, Envases del Pacifico has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 9.8%.

Check out our latest analysis for Envases del Pacifico

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'd like to look at how Envases del Pacifico has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Envases del Pacifico's historical ROCE trend, it isn't fantastic. The company used to generate 5.1% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 24% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Envases del Pacifico's current liabilities have increased over the last five years to 34% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.2%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line On Envases del Pacifico's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Investors haven't taken kindly to these developments, since the stock has declined 47% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing Envases del Pacifico we've found 5 warning signs (4 are a bit concerning!) that you should be aware of before investing here.

While Envases del Pacifico may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.