Be Wary Of Compañía Eléctrica del Litoral (SNSE:LITORAL) And Its Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Compañía Eléctrica del Litoral (SNSE:LITORAL), the trends above didn't look too great.

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 Compañía Eléctrica del Litoral:

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

0.019 = CL$345m ÷ (CL$23b - CL$5.0b) (Based on the trailing twelve months to March 2021).

So, Compañía Eléctrica del Litoral has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 8.6%.

View our latest analysis for Compañía Eléctrica del Litoral

Historical performance is a great place to start when researching a stock so above you can see the gauge for Compañía Eléctrica del Litoral's ROCE against it's prior returns. If you're interested in investigating Compañía Eléctrica del Litoral's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Compañía Eléctrica del Litoral's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 14%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Compañía Eléctrica del Litoral to turn into a multi-bagger.

Our Take On Compañía Eléctrica del Litoral's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 7.4% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about Compañía Eléctrica del Litoral, we've spotted 3 warning signs, and 1 of them is potentially serious.

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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