Returns On Capital Are Showing Encouraging Signs At Compañía General de Electricidad (SNSE:CGE)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Compañía General de Electricidad (SNSE:CGE) looks quite promising in regards to its trends of return on capital.

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 Compañía General de Electricidad:

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

0.077 = CL$219b ÷ (CL$3.9t - CL$1.1t) (Based on the trailing twelve months to September 2024).

Thus, Compañía General de Electricidad has an ROCE of 7.7%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 17%.

See our latest analysis for Compañía General de Electricidad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Compañía General de Electricidad's ROCE against it's prior returns. If you'd like to look at how Compañía General de Electricidad has performed in the past in other metrics, you can view this free graph of Compañía General de Electricidad's past earnings, revenue and cash flow.

So How Is Compañía General de Electricidad's ROCE Trending?

Compañía General de Electricidad's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 54% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 28% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

In summary, we're delighted to see that Compañía General de Electricidad has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 23% 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.

Compañía General de Electricidad does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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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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.