Should You Be Impressed By Minera Valparaiso's (SNSE:MINERA) Returns on Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Although, when we looked at Minera Valparaiso (SNSE:MINERA), 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. To calculate this metric for Minera Valparaiso, this is the formula:

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).

So, Minera Valparaiso has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 8.0%.

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 want to delve into the historical earnings, revenue and cash flow of Minera Valparaiso, check out these free graphs here.

How Are Returns Trending?

There hasn't been much to report for Minera Valparaiso's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Minera Valparaiso in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

What We Can Learn From Minera Valparaiso's ROCE

We can conclude that in regards to Minera Valparaiso's returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 38% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a separate note, we've found 3 warning signs for Minera Valparaiso you'll probably want to know about.

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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