How Has Even Construtora e Incorporadora (BVMF:EVEN3) Allocated Its Capital?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Even Construtora e Incorporadora (BVMF:EVEN3), we weren't too upbeat about how things were going.

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 Even Construtora e Incorporadora, this is the formula:

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

0.042 = R$153m ÷ (R$4.9b - R$1.2b) (Based on the trailing twelve months to June 2020).

Thus, Even Construtora e Incorporadora has an ROCE of 4.2%. In absolute terms, that's a low return but it's around the Consumer Durables industry average of 5.0%.

See our latest analysis for Even Construtora e Incorporadora

In the above chart we have a measured Even Construtora e Incorporadora'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 report for Even Construtora e Incorporadora.

What Does the ROCE Trend For Even Construtora e Incorporadora Tell Us?

There is reason to be cautious about Even Construtora e Incorporadora, given the returns are trending downwards. To be more specific, the ROCE was 5.4% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Even Construtora e Incorporadora to turn into a multi-bagger.

Our Take On Even Construtora e Incorporadora's ROCE

In summary, it's unfortunate that Even Construtora e Incorporadora is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 385%. Regardless, we don't feel to comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 2 warning signs for Even Construtora e Incorporadora you'll probably want to know about.

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

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