Investors Will Want Empresa Nacional de Telecomunicaciones' (SNSE:ENTEL) Growth In ROCE To Persist

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Empresa Nacional de Telecomunicaciones' (SNSE:ENTEL) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Empresa Nacional de Telecomunicaciones:

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

0.062 = CL$272b ÷ (CL$5.3t - CL$921b) (Based on the trailing twelve months to September 2021).

Thus, Empresa Nacional de Telecomunicaciones has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Wireless Telecom industry average of 8.8%.

Check out our latest analysis for Empresa Nacional de Telecomunicaciones

In the above chart we have measured Empresa Nacional de Telecomunicaciones' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.2%. Basically the business is earning more per dollar of capital invested and in addition to that, 49% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line

To sum it up, Empresa Nacional de Telecomunicaciones has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 46% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing, we've spotted 4 warning signs facing Empresa Nacional de Telecomunicaciones that you might find interesting.

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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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.