Be Wary Of Iochpe-Maxion (BVMF:MYPK3) And Its Returns On Capital

By
Simply Wall St
Published
June 03, 2021
BOVESPA:MYPK3
Source: Shutterstock

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Iochpe-Maxion (BVMF:MYPK3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Iochpe-Maxion:

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

0.018 = R$134m ÷ (R$14b - R$6.1b) (Based on the trailing twelve months to March 2021).

Thus, Iochpe-Maxion has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 15%.

View our latest analysis for Iochpe-Maxion

roce
BOVESPA:MYPK3 Return on Capital Employed June 3rd 2021

In the above chart we have measured Iochpe-Maxion'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.

So How Is Iochpe-Maxion's ROCE Trending?

In terms of Iochpe-Maxion's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.8% from 9.0% five years ago. However it looks like Iochpe-Maxion 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.

Another thing to note, Iochpe-Maxion has a high ratio of current liabilities to total assets of 45%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Iochpe-Maxion's ROCE

To conclude, we've found that Iochpe-Maxion is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 21% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we found 2 warning signs for Iochpe-Maxion (1 is significant) you should be aware of.

While Iochpe-Maxion 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.

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