Here's What To Make Of Enel Américas' (SNSE:ENELAM) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Enel Américas (SNSE:ENELAM), it didn't seem to tick all of these boxes.

What is 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. The formula for this calculation on Enel Américas is:

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

0.11 = US$2.0b ÷ (US$25b - US$6.6b) (Based on the trailing twelve months to September 2020).

So, Enel Américas has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.7% generated by the Electric Utilities industry.

View our latest analysis for Enel Américas

In the above chart we have measured Enel Américas' 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 Enel Américas here for free.

The Trend Of ROCE

Over the past five years, Enel Américas' 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 Enel Américas to be a multi-bagger going forward.

Our Take On Enel Américas' ROCE

In a nutshell, Enel Américas 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 42% 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.

On a separate note, we've found 2 warning signs for Enel Américas you'll probably want to know about.

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