Stock Analysis

Esval (SNSE:ESVAL-C) Has Some Way To Go To Become A Multi-Bagger

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What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Esval (SNSE:ESVAL-C), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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 Esval:

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

0.062 = CL$72b ÷ (CL$1.2t - CL$97b) (Based on the trailing twelve months to December 2022).

Therefore, Esval has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 9.1%.

Check out our latest analysis for Esval

SNSE:ESVAL-C Return on Capital Employed March 31st 2023

Historical performance is a great place to start when researching a stock so above you can see the gauge for Esval's ROCE against it's prior returns. If you'd like to look at how Esval has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Esval Tell Us?

There are better returns on capital out there than what we're seeing at Esval. Over the past five years, ROCE has remained relatively flat at around 6.2% and the business has deployed 25% more capital into its operations. 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 Esval's ROCE

Long story short, while Esval has been reinvesting its capital, the returns that it's generating haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 115% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing: We've identified 5 warning signs with Esval (at least 3 which are a bit concerning) , and understanding them would certainly be useful.

While Esval may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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

Find out whether Esval 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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