Is Minera Valparaiso (SNSE:MINERA) 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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Minera Valparaiso (SNSE:MINERA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Minera Valparaiso is:

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

0.045 = US$418m ÷ (US$9.7b - US$288m) (Based on the trailing twelve months to September 2020).

Therefore, Minera Valparaiso has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 7.1%.

View our latest analysis for Minera Valparaiso

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

What The Trend Of ROCE Can Tell Us

Over the past five years, Minera Valparaiso's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Minera Valparaiso doesn't end up being a multi-bagger in a few years time.

What We Can Learn From Minera Valparaiso's ROCE

In summary, Minera Valparaiso isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 28% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you want to continue researching Minera Valparaiso, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Minera Valparaiso 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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