Returns On Capital Tell Us A Lot About Energía Latina (SNSE:ENLASA)

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Energía Latina (SNSE:ENLASA) we aren't filled with optimism, but let's investigate further.

What is 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 Energía Latina, this is the formula:

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

0.049 = US$5.6m ÷ (US$123m - US$10m) (Based on the trailing twelve months to September 2020).

So, Energía Latina has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 7.4%.

Check out our latest analysis for Energía Latina

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Energía Latina, check out these free graphs here.

The Trend Of ROCE

In terms of Energía Latina's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 6.6% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Energía Latina to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Energía Latina is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 18% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Energía Latina does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is concerning...

While Energía Latina isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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