Is EZTEC Empreendimentos e Participações (BVMF:EZTC3) Likely To Turn Things Around?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think EZTEC Empreendimentos e Participações (BVMF:EZTC3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for EZTEC Empreendimentos e Participações, this is the formula:

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

0.048 = R$192m ÷ (R$4.4b - R$355m) (Based on the trailing twelve months to March 2020).

Therefore, EZTEC Empreendimentos e Participações has an ROCE of 4.8%. Even though it's in line with the industry average of 5.3%, it's still a low return by itself.

View our latest analysis for EZTEC Empreendimentos e Participações

In the above chart we have a measured EZTEC Empreendimentos e Participações' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering EZTEC Empreendimentos e Participações here for free.

What Does the ROCE Trend For EZTEC Empreendimentos e Participações Tell Us?

When we looked at the ROCE trend at EZTEC Empreendimentos e Participações, we didn't gain much confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 4.8%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for EZTEC Empreendimentos e Participações. And the stock has done incredibly well with a 379% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we've found 2 warning signs for EZTEC Empreendimentos e Participações that we think you should be aware of.

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This article by Simply Wall St is general in nature. 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.
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