Telefónica Chile (SNSE:CTC) Will Be Hoping To Turn Its Returns On Capital Around

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Telefónica Chile (SNSE:CTC), the trends above didn't look too great.

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. To calculate this metric for Telefónica Chile, this is the formula:

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

0.015 = CL$21b ÷ (CL$1.7t - CL$288b) (Based on the trailing twelve months to March 2021).

So, Telefónica Chile has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Telecom industry average of 9.4%.

View 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 want to delve into the historical earnings, revenue and cash flow of Telefónica Chile, check out these free graphs here.

What Can We Tell From Telefónica Chile's ROCE Trend?

There is reason to be cautious about Telefónica Chile, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 4.0% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Telefónica Chile becoming one if things continue as they have.

The Bottom Line On Telefónica Chile's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 12% return to shareholders who held over the last three years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Telefónica Chile does have some risks, we noticed 5 warning signs (and 2 which are a bit concerning) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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