Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we take a look at a few key financial metrics. Ideally, a business will display two trends; first growth return on capital employed (ROCE) and, on the other hand, an increase amount 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. In light of this, when we looked Empresas Copec (SNSE: COPEC) and its ROCE trend, we weren’t exactly thrilled.
Return on capital employed (ROCE): what is it?
If you’ve never worked with ROCE before, it measures the “ return ” (profit before tax) that a business generates from the capital employed in its business. To calculate this metric for Empresas Copec, here is the formula:
Return on capital employed = Earnings before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.037 = $ 826 million Ã· ($ 25 billion – $ 2.8 billion) (Based on the last twelve months up to December 2020).
Therefore, Empresas Copec has a ROCE of 3.7%. In the end, that’s a low return and underperforming the oil and gas industry average of 5.8%.
See our latest review for Empresas Copec
Above you can see how Empresas Copec’s current ROCE compares to its past returns on capital, but you can’t say more about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Empresas Copec.
What can we say about the ROCE trend of Empresas Copec?
When it comes to Empresas Copec’s historic ROCE movements, the trend is not great. About five years ago the return on capital was 7.0%, but since then it has fallen to 3.7%. Considering that the company is employing more capital as revenues have declined, this is a bit of a concern. This could mean that the company loses its competitive advantage or its market share, because if more money is invested in companies, it actually produces a lower return – âless bang for the buckâ per se.
What we can learn from the ROCE of Empresas Copec
In summary, we are somewhat concerned about the diminishing returns of Empresas Copec on increasing amounts of capital. Investors should expect better things on the horizon, however, as the stock has risen 32% in the past five years. Either way, we’re not big fans of current trends, so we think you might find better investments elsewhere.
Empresas Copec does involve certain risks, however, we have observed 2 warning signs in our investment analysis, and 1 of these does not suit us too much …
Although Empresas Copec does not achieve the highest return, take a look at this free list of companies that achieve high returns on their equity with strong balance sheets.
If you want to trade a wide range of investments, open an account with the cheapest * professional approved platform, Interactive Brokers. Their clients from more than 200 countries and territories trade stocks, options, futures, currencies, bonds and funds around the world from a single integrated account.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
*Interactive Brokers ranked Least Expensive Broker by StockBrokers.com Annual Online Review 2020
Do you have any comments on this article? Concerned about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.