Our Take On The Returns On Capital At Instituto Hermes Pardini (BVMF:PARD3)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Instituto Hermes Pardini (BVMF:PARD3), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

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 Instituto Hermes Pardini, this is the formula:

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

0.11 = R$162m ÷ (R$1.9b - R$428m) (Based on the trailing twelve months to June 2020).

Therefore, Instituto Hermes Pardini has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Healthcare industry average of 13%.

See our latest analysis for Instituto Hermes Pardini

In the above chart we have measured Instituto Hermes Pardini's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Instituto Hermes Pardini Tell Us?

When we looked at the ROCE trend at Instituto Hermes Pardini, we didn't gain much confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 11%. However it looks like Instituto Hermes Pardini might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Instituto Hermes Pardini's ROCE

In summary, Instituto Hermes Pardini is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 21% in the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing to note, we've identified 1 warning sign with Instituto Hermes Pardini and understanding this should be part of your investment process.

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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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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