Here's What To Make Of Mills Estruturas e Serviços de Engenharia's (BVMF:MILS3) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Mills Estruturas e Serviços de Engenharia (BVMF:MILS3) and its ROCE trend, we weren't exactly thrilled.

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 Mills Estruturas e Serviços de Engenharia, this is the formula:

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

0.024 = R$31m ÷ (R$1.4b - R$120m) (Based on the trailing twelve months to September 2020).

Thus, Mills Estruturas e Serviços de Engenharia has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 8.7%.

Check out our latest analysis for Mills Estruturas e Serviços de Engenharia

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mills Estruturas e Serviços de Engenharia's ROCE against it's prior returns. If you'd like to look at how Mills Estruturas e Serviços de Engenharia 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 Mills Estruturas e Serviços de Engenharia Tell Us?

Over the past five years, Mills Estruturas e Serviços de Engenharia's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Mills Estruturas e Serviços de Engenharia doesn't end up being a multi-bagger in a few years time.

In Conclusion...

In a nutshell, Mills Estruturas e Serviços de Engenharia has been trudging along with the same returns from the same amount of capital over the last five years. Yet to long term shareholders the stock has gifted them an incredible 179% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Like most companies, Mills Estruturas e Serviços de Engenharia does come with some risks, and we've found 1 warning sign that you should be aware of.

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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