Compañía Industrial El Volcán (SNSE:VOLCAN) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Compañía Industrial El Volcán (SNSE:VOLCAN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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. Analysts use this formula to calculate it for Compañía Industrial El Volcán:

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

0.048 = CL$18b ÷ (CL$388b - CL$22b) (Based on the trailing twelve months to September 2023).

Therefore, Compañía Industrial El Volcán has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 9.9%.

Check out our latest analysis for Compañía Industrial El Volcán

Historical performance is a great place to start when researching a stock so above you can see the gauge for Compañía Industrial El Volcán's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Compañía Industrial El Volcán.

So How Is Compañía Industrial El Volcán's ROCE Trending?

When we looked at the ROCE trend at Compañía Industrial El Volcán, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Compañía Industrial El Volcán's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 29% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a separate note, we've found 2 warning signs for Compañía Industrial El Volcán you'll probably want to know about.

While Compañía Industrial El Volcán 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.