Returns On Capital At Ferrocarril del Pacífico (SNSE:FEPASA) Paint An Interesting Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Although, when we looked at Ferrocarril del Pacífico (SNSE:FEPASA), it didn't seem to tick all of these boxes.

What is 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 Ferrocarril del Pacífico, this is the formula:

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

0.014 = CL$1.3b ÷ (CL$112b - CL$19b) (Based on the trailing twelve months to September 2020).

Therefore, Ferrocarril del Pacífico has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 7.5%.

View our latest analysis for Ferrocarril del Pacífico

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Ferrocarril del Pacífico, check out these free graphs here.

What Does the ROCE Trend For Ferrocarril del Pacífico Tell Us?

When we looked at the ROCE trend at Ferrocarril del Pacífico, we didn't gain much confidence. Around five years ago the returns on capital were 4.6%, but since then they've fallen to 1.4%. 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.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Ferrocarril del Pacífico's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 13% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know about the risks facing Ferrocarril del Pacífico, we've discovered 3 warning signs that 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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