Be Wary Of Aguas Andinas (SNSE:AGUAS-A) And Its Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Aguas Andinas (SNSE:AGUAS-A), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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 Aguas Andinas:

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

0.09 = CL$171b ÷ (CL$2.1t - CL$254b) (Based on the trailing twelve months to June 2021).

Therefore, Aguas Andinas has an ROCE of 9.0%. On its own, that's a low figure but it's around the 8.4% average generated by the Water Utilities industry.

See our latest analysis for Aguas Andinas

Above you can see how the current ROCE for Aguas Andinas compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Aguas Andinas.

What Does the ROCE Trend For Aguas Andinas Tell Us?

When we looked at the ROCE trend at Aguas Andinas, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 9.0%. However it looks like Aguas Andinas might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Aguas Andinas is reinvesting in the business, but returns have been falling. Since the stock has declined 46% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Aguas Andinas does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

While Aguas Andinas isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.
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