Investors Could Be Concerned With Ambipar Participações e Empreendimentos' (BVMF:AMBP3) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Ambipar Participações e Empreendimentos (BVMF:AMBP3) and its ROCE trend, we weren't exactly thrilled.

What Is 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 Ambipar Participações e Empreendimentos is:

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

0.098 = R$884m ÷ (R$11b - R$1.8b) (Based on the trailing twelve months to June 2023).

Thus, Ambipar Participações e Empreendimentos has an ROCE of 9.8%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 14%.

View 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Ambipar Participações e Empreendimentos Tell Us?

On the surface, the trend of ROCE at Ambipar Participações e Empreendimentos doesn't inspire confidence. To be more specific, ROCE has fallen from 13% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Ambipar Participações e Empreendimentos' ROCE

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. These growth trends haven't led to growth returns though, since the stock has fallen 37% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 2 warning signs we've spotted with Ambipar Participações e Empreendimentos (including 1 which is a bit concerning) .

While Ambipar Participações e Empreendimentos isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.