The Returns At Empresa Eléctrica de Magallanes (SNSE:EDELMAG) Provide Us With Signs Of What's To Come

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Empresa Eléctrica de Magallanes (SNSE:EDELMAG), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Empresa Eléctrica de Magallanes is:

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

0.12 = CL$9.5b ÷ (CL$89b - CL$11b) (Based on the trailing twelve months to December 2020).

Thus, Empresa Eléctrica de Magallanes has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Electric Utilities industry.

Check out 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.

The Trend Of ROCE

Over the past five years, Empresa Eléctrica de Magallanes' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Empresa Eléctrica de Magallanes to be a multi-bagger going forward.

Our Take On Empresa Eléctrica de Magallanes' ROCE

In a nutshell, Empresa Eléctrica de Magallanes has been trudging along with the same returns from the same amount of capital over the last five years. Although the market must be expecting these trends to improve because the stock has gained 96% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing, we've spotted 1 warning sign facing Empresa Eléctrica de Magallanes that you might find interesting.

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