The Returns On Capital At Enel Américas (SNSE:ENELAM) Don't Inspire Confidence

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. 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.

Understanding 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 Enel Américas, this is the formula:

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

0.085 = US$2.3b ÷ (US$34b - US$7.2b) (Based on the trailing twelve months to June 2024).

Thus, Enel Américas has an ROCE of 8.5%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 12%.

See our latest analysis for Enel Américas

Above you can see how the current ROCE for Enel Américas compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Enel Américas .

How Are Returns Trending?

On the surface, the trend of ROCE at Enel Américas doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 8.5%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Enel Américas' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 19% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Enel Américas has the makings of a multi-bagger.

Enel Américas could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for ENELAM on our platform quite valuable.

While Enel Américas may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.