Returns On Capital - An Important Metric For Engie Energia Chile (SNSE:ECL)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Engie Energia Chile (SNSE:ECL) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Engie Energia Chile, this is the formula:

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

0.08 = US$272m ÷ (US$3.7b - US$323m) (Based on the trailing twelve months to December 2020).

So, Engie Energia Chile has an ROCE of 8.0%. On its own, that's a low figure but it's around the 9.7% average generated by the Electric Utilities industry.

Check out our latest analysis for Engie Energia Chile

In the above chart we have measured Engie Energia Chile's 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 Engie Energia Chile here for free.

What The Trend Of ROCE Can Tell Us

Engie Energia Chile is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 29% 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. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line

To sum it up, Engie Energia Chile is collecting higher returns from the same amount of capital, and that's impressive. Considering the stock has delivered 4.9% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Engie Energia Chile does have some risks though, and we've spotted 2 warning signs for Engie Energia Chile that you might be interested in.

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This article by Simply Wall St is general in nature. 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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