Here's What To Make Of Mills Estruturas e Serviços de Engenharia's (BVMF:MILS3) Decelerating Rates Of Return

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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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)

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. The formula for this calculation on Mills Estruturas e Serviços de Engenharia is:

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).

Therefore, Mills Estruturas e Serviços de Engenharia has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 11%.

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

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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 Can We Tell From Mills Estruturas e Serviços de Engenharia's ROCE Trend?

Things have been pretty stable at Mills Estruturas e Serviços de Engenharia, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. 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.

Our Take On Mills Estruturas e Serviços de Engenharia's ROCE

We can conclude that in regards to Mills Estruturas e Serviços de Engenharia's returns on capital employed and the trends, there isn't much change to report on. Yet to long term shareholders the stock has gifted them an incredible 108% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Mills Estruturas e Serviços de Engenharia does have some risks though, and we've spotted 1 warning sign for Mills Estruturas e Serviços de Engenharia that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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