Should You Be Worried About Telefónica Chile's (SNSE:CTC) Returns On Capital?

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. In light of that, from a first glance at Telefónica Chile (SNSE:CTC), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Telefónica Chile:

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

0.0071 = CL$9.6b ÷ (CL$1.7t - CL$325b) (Based on the trailing twelve months to December 2020).

So, Telefónica Chile has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Telecom industry average of 4.6%.

See our latest analysis for Telefónica Chile

Historical performance is a great place to start when researching a stock so above you can see the gauge for Telefónica Chile's ROCE against it's prior returns. If you're interested in investigating Telefónica Chile's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Telefónica Chile's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 3.5% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Telefónica Chile to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Telefónica Chile is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 11% over the last three years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Telefónica Chile (2 are potentially serious) you should be aware of.

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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