There are a few key trends to look for if we are to identify the next multi-bagger. First, we would like to identify a growth to recover on capital employed (ROCE) and at the same time, a based capital employed. This shows us that it is a composing machine, capable of continually reinvesting its profits in the business and generating higher returns. However, after investigation Enel Americas (SNSE: ENELAM), we don’t think current trends fit the mold of a multi-bagger.
What is Return on Employee Capital (ROCE)?
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. Analysts use this formula to calculate it for Enel Americas:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.077 = US $ 2.2B ÷ (US $ 35B – US $ 7.0B) (Based on the last twelve months up to June 2021).
Therefore, Enel Américas has a ROCE of 7.7%. On its own, this is a low return on capital, but it is in line with industry average returns of 7.7%.
See our latest review for Enel Américas
Above you can see how Enel Américas’ current ROCE compares to its previous returns on capital, but there isn’t much you can say about the past. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
What the ROCE trend can tell us
On the surface, the ROCE trend at Enel Américas does not inspire confidence. About five years ago, returns on capital were 16%, but since then they have fallen to 7.7%. However, it appears that Enel Américas 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 may take some time for the business to begin to see a change in the benefits of these investments.
The bottom line
In conclusion, we have seen that Enel Américas is reinvesting in the company, but the returns are declining. And since the stock has only returned 5.4% to shareholders over the past five years, one could argue that they are aware of these gloomy trends. So if you’re looking for a multi-bagger, the underlying trends indicate you might have a better chance elsewhere.
One last thing to note, we have identified 3 warning signs with Enel Américas and understanding them should be part of your investment process.
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.
When trading stocks or any other investment, use the platform considered by many to be the gateway for professionals to the global market, Interactive Brokers. You get the cheapest * trading on stocks, options, futures, forex, bonds and funds from around the world from a single integrated account. Promoted
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 the mentioned stocks.
*Interactive Brokers Ranked Least Expensive Broker By StockBrokers.com Online Annual Review 2020
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.