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

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Empresas Tricot (SNSE:TRICOT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. Analysts use this formula to calculate it for Empresas Tricot:

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

0.14 = CL$29b ÷ (CL$275b - CL$61b) (Based on the trailing twelve months to September 2021).

Thus, Empresas Tricot has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 13%.

See our latest analysis for Empresas Tricot

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

What Can We Tell From Empresas Tricot's ROCE Trend?

When we looked at the ROCE trend at Empresas Tricot, we didn't gain much confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 14%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Empresas Tricot. However, despite the promising trends, the stock has fallen 61% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to know some of the risks facing Empresas Tricot we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Empresas Tricot 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.