Construtora Adolpho Lindenberg (BVMF:CALI3) Shareholders Will Want The ROCE Trajectory To Continue

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So on that note, Construtora Adolpho Lindenberg (BVMF:CALI3) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Construtora Adolpho Lindenberg, this is the formula:

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

0.071 = R$11m ÷ (R$227m - R$70m) (Based on the trailing twelve months to December 2022).

Therefore, Construtora Adolpho Lindenberg has an ROCE of 7.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 9.3%.

View our latest analysis for Construtora Adolpho Lindenberg

Historical performance is a great place to start when researching a stock so above you can see the gauge for Construtora Adolpho Lindenberg's ROCE against it's prior returns. If you'd like to look at how Construtora Adolpho Lindenberg has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Construtora Adolpho Lindenberg Tell Us?

Construtora Adolpho Lindenberg has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 7.1% on its capital. And unsurprisingly, like most companies trying to break into the black, Construtora Adolpho Lindenberg is utilizing 289% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 31% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

Our Take On Construtora Adolpho Lindenberg's ROCE

To the delight of most shareholders, Construtora Adolpho Lindenberg has now broken into profitability. And a remarkable 170% total return over the last year tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know more about Construtora Adolpho Lindenberg, we've spotted 7 warning signs, and 4 of them are a bit concerning.

While Construtora Adolpho Lindenberg may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.