Aguas Andinas (SNSE:AGUAS-A) Will Be Hoping To Turn Its Returns On Capital Around

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at Aguas Andinas (SNSE:AGUAS-A), 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 Aguas Andinas, this is the formula:

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

0.082 = CL$159b ÷ (CL$2.2t - CL$249b) (Based on the trailing twelve months to March 2021).

Therefore, Aguas Andinas has an ROCE of 8.2%. Even though it's in line with the industry average of 8.2%, it's still a low return by itself.

View our latest analysis for Aguas Andinas

In the above chart we have measured Aguas Andinas' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Aguas Andinas here for free.

So How Is Aguas Andinas' ROCE Trending?

In terms of Aguas Andinas' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.2% from 14% five years ago. 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 Bottom Line On Aguas Andinas' ROCE

To conclude, we've found that Aguas Andinas is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 45% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we found 4 warning signs for Aguas Andinas (2 make us uncomfortable) you should be aware of.

While Aguas Andinas may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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