São Martinho (BVMF:SMTO3) Hasn't Managed To Accelerate Its Returns

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at São Martinho (BVMF:SMTO3), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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 São Martinho, this is the formula:

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

0.075 = R$1.3b ÷ (R$19b - R$2.4b) (Based on the trailing twelve months to December 2023).

So, São Martinho has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.4%.

View our latest analysis for São Martinho

Above you can see how the current ROCE for São Martinho compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for São Martinho .

What Can We Tell From São Martinho's ROCE Trend?

There are better returns on capital out there than what we're seeing at São Martinho. The company has employed 106% more capital in the last five years, and the returns on that capital have remained stable at 7.5%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From São Martinho's ROCE

In conclusion, São Martinho has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 92% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know about the risks facing São Martinho, we've discovered 3 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.