GPS Participações e Empreendimentos (BVMF:GGPS3) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think GPS Participações e Empreendimentos (BVMF:GGPS3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for GPS Participações e Empreendimentos, this is the formula:

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

0.14 = R$1.0b ÷ (R$9.3b - R$2.1b) (Based on the trailing twelve months to March 2023).

Thus, GPS Participações e Empreendimentos has an ROCE of 14%. That's a pretty standard return and it's in line with the industry average of 14%.

View our latest analysis for GPS Participações e Empreendimentos

Above you can see how the current ROCE for GPS 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 report for GPS Participações e Empreendimentos.

How Are Returns Trending?

When we looked at the ROCE trend at GPS Participações e Empreendimentos, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 14% from 22% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, GPS Participações e Empreendimentos has done well to pay down its current liabilities to 22% 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 On GPS Participações e Empreendimentos' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that GPS Participações e Empreendimentos is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 19% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you're still interested in GPS Participações e Empreendimentos it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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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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.