What Enel Distribucion Chile's (SNSE:ENELDXCH) Returns On Capital Can Tell Us

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Enel Distribucion Chile (SNSE:ENELDXCH) we aren't filled with optimism, but let's investigate further.

Understanding 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. Analysts use this formula to calculate it for Enel Distribucion Chile:

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

0.082 = CL$106b ÷ (CL$1.7t - CL$366b) (Based on the trailing twelve months to September 2020).

Thus, Enel Distribucion Chile has an ROCE of 8.2%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 9.7%.

See our latest analysis for Enel Distribucion Chile

Historical performance is a great place to start when researching a stock so above you can see the gauge for Enel Distribucion Chile's ROCE against it's prior returns. If you'd like to look at how Enel Distribucion Chile 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?

In terms of Enel Distribucion Chile's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 12%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Enel Distribucion Chile to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Enel Distribucion Chile is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 27% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Enel Distribucion Chile (including 1 which is makes us a bit uncomfortable) .

While Enel Distribucion 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. 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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