Suzano (BVMF:SUZB3) Might Be Having Difficulty Using Its Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Suzano (BVMF:SUZB3), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Suzano, this is the formula:

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

0.084 = R$11b ÷ (R$144b - R$15b) (Based on the trailing twelve months to December 2023).

Therefore, Suzano has an ROCE of 8.4%. Even though it's in line with the industry average of 8.4%, it's still a low return by itself.

View our latest analysis for Suzano

In the above chart we have measured Suzano's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Suzano .

What Does the ROCE Trend For Suzano Tell Us?

When we looked at the ROCE trend at Suzano, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 8.4%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Suzano's ROCE

In summary, we're somewhat concerned by Suzano's diminishing returns on increasing amounts of capital. However the stock has delivered a 64% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to know some of the risks facing Suzano we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Suzano isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.