Returns On Capital At El Puerto de Liverpool. de (BMV:LIVEPOLC-1) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at El Puerto de Liverpool. de (BMV:LIVEPOLC-1), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for El Puerto de Liverpool. de, this is the formula:

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

0.024 = Mex$4.0b ÷ (Mex$195b - Mex$32b) (Based on the trailing twelve months to March 2021).

Thus, El Puerto de Liverpool. de has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 3.5%.

View our latest analysis for El Puerto de Liverpool. de

In the above chart we have measured El Puerto de Liverpool. de's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering El Puerto de Liverpool. de here for free.

The Trend Of ROCE

When we looked at the ROCE trend at El Puerto de Liverpool. de, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.4% from 14% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On El Puerto de Liverpool. de's ROCE

In summary, we're somewhat concerned by El Puerto de Liverpool. de's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 52% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 3 warning signs with El Puerto de Liverpool. de and understanding these should be part of your investment process.

While El Puerto de Liverpool. de isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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