The Returns At Empresa Eléctrica de Magallanes (SNSE:EDELMAG) Aren't Growing

Did you know there are some financial metrics that can provide clues of a potential 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Empresa Eléctrica de Magallanes (SNSE:EDELMAG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Empresa Eléctrica de Magallanes:

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

0.12 = CL$9.1b ÷ (CL$88b - CL$11b) (Based on the trailing twelve months to March 2021).

So, Empresa Eléctrica de Magallanes has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Electric Utilities industry average of 8.2% it's much better.

See our latest analysis for Empresa Eléctrica de Magallanes

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'd like to look at how Empresa Eléctrica de Magallanes has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

There hasn't been much to report for Empresa Eléctrica de Magallanes' returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Empresa Eléctrica de Magallanes in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

Our Take On Empresa Eléctrica de Magallanes' ROCE

We can conclude that in regards to Empresa Eléctrica de Magallanes' returns on capital employed and the trends, there isn't much change to report on. Although the market must be expecting these trends to improve because the stock has gained 64% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Empresa Eléctrica de Magallanes does have some risks though, and we've spotted 1 warning sign for Empresa Eléctrica de Magallanes that you might be interested in.

While Empresa Eléctrica de Magallanes 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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