Investors Shouldn't Overlook Enel Generación Chile's (SNSE:ENELGXCH) Impressive Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of Enel Generación Chile (SNSE:ENELGXCH) we really liked what we saw.

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. To calculate this metric for Enel Generación Chile, this is the formula:

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

0.25 = CL$900b ÷ (CL$4.6t - CL$1.0t) (Based on the trailing twelve months to September 2024).

So, Enel Generación Chile has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Renewable Energy industry average of 6.8%.

View our latest analysis for Enel Generación Chile

Historical performance is a great place to start when researching a stock so above you can see the gauge for Enel Generación Chile's ROCE against it's prior returns. If you're interested in investigating Enel Generación Chile's past further, check out this free graph covering Enel Generación Chile's past earnings, revenue and cash flow.

How Are Returns Trending?

Enel Generación Chile's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 52% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Key Takeaway

To sum it up, Enel Generación Chile is collecting higher returns from the same amount of capital, and that's impressive. And with a respectable 77% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Enel Generación Chile can keep these trends up, it could have a bright future ahead.

Like most companies, Enel Generación Chile does come with some risks, and we've found 1 warning sign that you should be aware of.

Enel Generación Chile is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.