Has Tupy (BVMF:TUPY3) Got What It Takes To Become A Multi-Bagger?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Tupy (BVMF:TUPY3) 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)

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 Tupy, this is the formula:

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

0.073 = R$345m ÷ (R$6.4b - R$1.7b) (Based on the trailing twelve months to September 2020).

So, Tupy has an ROCE of 7.3%. In absolute terms, that's a low return but it's around the Auto Components industry average of 6.4%.

View our latest analysis for Tupy

In the above chart we have measured Tupy's 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 Tupy here for free.

What Can We Tell From Tupy's ROCE Trend?

Over the past five years, Tupy's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Tupy in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. On top of that you'll notice that Tupy has been paying out a large portion (60%) of earnings in the form of dividends to shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.

In Conclusion...

We can conclude that in regards to Tupy's returns on capital employed and the trends, there isn't much change to report on. Although the market must be expecting these trends to improve because the stock has gained 52% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we've found 1 warning sign for Tupy that we think you should be aware of.

While Tupy 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. 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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