Here's What's Concerning About Enel Chile's (SNSE:ENELCHILE) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Enel Chile (SNSE:ENELCHILE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. The formula for this calculation on Enel Chile is:

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

0.087 = CL$609b ÷ (CL$8.2t - CL$1.2t) (Based on the trailing twelve months to June 2021).

Thus, Enel Chile has an ROCE of 8.7%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 7.7%.

Check out our latest analysis for Enel Chile

Above you can see how the current ROCE for Enel Chile compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Enel Chile here for free.

So How Is Enel Chile's ROCE Trending?

On the surface, the trend of ROCE at Enel Chile doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 8.7%. However it looks like Enel Chile might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that Enel Chile is reinvesting in the business, but returns have been falling. Since the stock has declined 28% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

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

While Enel Chile 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.
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