Empresas Tricot (SNSE: TRICOT) might struggle to allocate capital

If you are looking for a multi-bagger, there are a few things to look out for. In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly reviewing the numbers, we don’t think Empresas knitwear (SNSE: TRICOT) has the makings of a multi-bagger in the future, but let’s see why this may be the case.

What is Return on Employee Capital (ROCE)?

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on Empresas Tricot is:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.077 = CL $ 16b ÷ (CL $ 264b – CL $ 53b) (Based on the last twelve months up to June 2021).

Therefore, Empresas Tricot has a ROCE of 7.7%. In absolute terms, this is a low return and it is also below the specialty retail industry average of 13%.

See our latest review for Empresas Tricot

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 dig deeper into Empresas Tricot’s past, check out this free graph of past income, income and cash flow.

What can we say about the ROCE trend from Empresas Tricot?

When it comes to Empresas Tricot’s historic ROCE movements, the trend is not great. About five years ago, returns on capital were 21%, but since then they have fallen to 7.7%. However, it appears that Empresas Tricot is reinvesting for long-term growth, because while the capital employed has increased, the company’s sales haven’t changed much in the past 12 months. It’s worth keeping an eye on the company’s profits from now on to see if those investments end up contributing to the bottom line.

In addition, Empresas Tricot has done well to reduce its short-term debts to 20% of total assets. So we could link some of that to the decrease in ROCE. In addition, it can reduce some aspects of the risk to the business, as the company’s suppliers or short-term creditors are now less funding its operations. Some argue that this reduces the company’s efficiency in generating ROCE since it now finances more of the operations with its own money.

The key to take away

In conclusion, we found that Empresas Tricot is reinvesting in the business, but the returns are declining. And over the past three years, the stock has lost 53%, so the market doesn’t seem overly bullish that these trends will strengthen anytime soon. Either way, the stock lacks the characteristics of a multi-bagger discussed above, so if that’s what you’re looking for, we think you might have better luck elsewhere.

Empresas Tricot does present some risks, however, and we have spotted 1 warning sign for Empresas Tricot that might interest you.

If you want to look for solid businesses with great income, check out this free list of companies with good balance sheets and impressive returns on equity.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is 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 documents. Simply Wall St has no position in any of the stocks mentioned.

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