Stock Analysis

Investors Could Be Concerned With Enel Generación Chile's (SNSE:ENELGXCH) Returns On Capital

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If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Enel Generación Chile (SNSE:ENELGXCH), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

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 Generación Chile:

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

0.063 = CL$179b ÷ (CL$3.5t - CL$637b) (Based on the trailing twelve months to March 2022).

Therefore, Enel Generación Chile has an ROCE of 6.3%. On its own that's a low return, but compared to the average of 4.3% generated by the Renewable Energy industry, it's much better.

View our latest analysis for Enel Generación Chile

SNSE:ENELGXCH Return on Capital Employed July 10th 2022

Above you can see how the current ROCE for Enel Generación Chile 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 report for Enel Generación Chile.

How Are Returns Trending?

There is reason to be cautious about Enel Generación Chile, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 16% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Enel Generación Chile becoming one if things continue as they have.

Our Take On Enel Generación Chile's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. This could explain why the stock has sunk a total of 73% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Enel Generación Chile we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Valuation is complex, but we're helping make it simple.

Find out whether Enel Generación Chile is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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