Is Compañía Eléctrica del Litoral (SNSE:LITORAL) Likely To Turn Things Around?

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Compañía Eléctrica del Litoral (SNSE:LITORAL) and its ROCE trend, we weren't exactly thrilled.

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. 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)

0.08 = CL$1.4b ÷ (CL$22b - CL$3.8b) (Based on the trailing twelve months to June 2020).

Thus, Compañía Eléctrica del Litoral has an ROCE of 8.0%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 9.7%.

Check out 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 Can We Tell From Compañía Eléctrica del Litoral's ROCE Trend?

When we looked at the ROCE trend at Compañía Eléctrica del Litoral, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.0% from 15% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

In summary, Compañía Eléctrica del Litoral is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 13% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Compañía Eléctrica del Litoral (including 1 which is can't be ignored) .

While Compañía Eléctrica del Litoral 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.

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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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