We Like These Underlying Trends At Enel Generación Chile (SNSE:ENELGXCH)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Enel Generación Chile's (SNSE:ENELGXCH) returns on capital, so let's have a look.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

0.16 = CL$410b ÷ (CL$2.9t - CL$345b) (Based on the trailing twelve months to September 2020).

Therefore, Enel Generación Chile has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Renewable Energy industry average of 7.4% it's much better.

Check out our latest analysis for Enel Generación Chile

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Enel Generación Chile Tell Us?

We're delighted to see that Enel Generación Chile is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Enel Generación Chile is using 55% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Enel Generación Chile could be selling under-performing assets since the ROCE is improving.

What We Can Learn From Enel Generación Chile's ROCE

From what we've seen above, Enel Generación Chile has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 42% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Enel Generación Chile does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

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.

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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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