Is Inversiones Aguas Metropolitanas (SNSE:IAM) Likely To Turn Things Around?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Inversiones Aguas Metropolitanas (SNSE:IAM), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Inversiones Aguas Metropolitanas:

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

0.094 = CL$201b ÷ (CL$2.4t - CL$252b) (Based on the trailing twelve months to June 2020).

Thus, Inversiones Aguas Metropolitanas has an ROCE of 9.4%. On its own, that's a low figure but it's around the 9.7% average generated by the Water Utilities industry.

See our latest analysis for Inversiones Aguas Metropolitanas

In the above chart we have measured Inversiones Aguas Metropolitanas' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Inversiones Aguas Metropolitanas' ROCE Trend?

On the surface, the trend of ROCE at Inversiones Aguas Metropolitanas doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.4% from 12% five years ago. However it looks like Inversiones Aguas Metropolitanas might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

In summary, Inversiones Aguas Metropolitanas is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 24% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Inversiones Aguas Metropolitanas does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

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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