Ambipar Participações e Empreendimentos (BVMF:AMBP3) Might Be Having Difficulty Using Its Capital Effectively

There are a few key trends to look for if we want to identify the next 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Ambipar Participações e Empreendimentos (BVMF:AMBP3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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 Ambipar Participações e Empreendimentos:

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

0.096 = R$1.1b ÷ (R$13b - R$1.7b) (Based on the trailing twelve months to June 2024).

So, Ambipar Participações e Empreendimentos has an ROCE of 9.6%. On its own, that's a low figure but it's around the 11% average generated by the Commercial Services industry.

Check out our latest analysis for Ambipar Participações e Empreendimentos

Above you can see how the current ROCE for Ambipar Participações e Empreendimentos compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Ambipar Participações e Empreendimentos .

What Can We Tell From Ambipar Participações e Empreendimentos' ROCE Trend?

In terms of Ambipar Participações e Empreendimentos' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.6% from 17% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Ambipar Participações e Empreendimentos has done well to pay down its current liabilities to 13% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Ambipar Participações e Empreendimentos is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 252% return over the last three years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you want to know some of the risks facing Ambipar Participações e Empreendimentos we've found 3 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

While Ambipar Participações e Empreendimentos 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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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.