Should You Be Impressed By Essbio's (SNSE:ESSBIO-C) Returns on Capital?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after briefly looking over the numbers, we don't think Essbio (SNSE:ESSBIO-C) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Essbio, this is the formula:

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

0.057 = CL$49b ÷ (CL$900b - CL$44b) (Based on the trailing twelve months to September 2020).

Thus, Essbio has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 9.5%.

See our latest analysis for Essbio

Historical performance is a great place to start when researching a stock so above you can see the gauge for Essbio's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Essbio, check out these free graphs here.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Essbio. The company has consistently earned 5.7% for the last five years, and the capital employed within the business has risen 21% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Essbio's ROCE

In conclusion, Essbio has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 74% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about Essbio, we've spotted 3 warning signs, and 2 of them can't be ignored.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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