To find multi-bagger stock, what are the underlying trends we need to look for in a business? Generally, we will want to notice a growing trend return on capital employed (ROCE) and at the same time, a based capital employed. Basically, it means that a business has profitable initiatives that it can keep reinvesting in, which is a hallmark of a dialing machine. That said, from the first glance at Electro Metalúrgica Company (SNSE: ELECMETAL) We’re not jumping from our chairs on the yield trend, but taking a closer look.
Understanding Return on Capital Employed (ROCE)
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. Analysts use this formula to calculate it for Compañía Electro Metalúrgica:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.056 = CL $ 55 billion (1.2 tonnes of CL $ – CL $ 184 billion) (Based on the last twelve months up to March 2021).
Therefore, Compañía Electro Metalúrgica has a ROCE of 5.6%. In absolute terms, this is a low return, but it sits around the industrials industry average of 4.9%.
See our latest review for Compañía Electro Metalúrgica
Although the past is not representative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to delve into Compañía Electro Metalúrgica’s earnings, income and cash flow history, check out these free graphics here.
What the ROCE trend can tell us
Regarding the historical ROCE movements of the Compañía Electro Metalúrgica, the trend is not fantastic. About five years ago, returns on capital were 10%, but since then they have fallen to 5.6%. Meanwhile, the company is using more capital, but it hasn’t changed much in terms of sales over the past 12 months, so it might reflect longer-term investments. It may take some time for the business to begin to see a change in the benefits of these investments.
The result on the ROCE of the Compañía Electro Metalúrgica
To conclude, we have seen that Compañía Electro Metalúrgica is reinvesting in the business, but the returns are declining. Given that the stock has gained an impressive 62% over the past five years, investors must think there are better things to come. However, unless these underlying trends turn more positive, our hopes would not be too high.
On a final note, we found 3 warning signs for Compañía Electro Metalúrgica (2 are a bit disturbing) you should be aware of.
While Compañía Electro Metalúrgica does not achieve the highest return, check out this free list of companies that generate high returns on equity with strong balance sheets.
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