GPS Participações e Empreendimentos (BVMF:GGPS3) Is Reinvesting At Lower Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. 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.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on GPS Participações e Empreendimentos is:

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

0.15 = R$1.1b ÷ (R$10b - R$2.5b) (Based on the trailing twelve months to December 2023).

Thus, GPS Participações e Empreendimentos has an ROCE of 15%. That's a pretty standard return and it's in line with the industry average of 15%.

See our latest analysis for GPS Participações e Empreendimentos

In the above chart we have measured GPS Participações e Empreendimentos' 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 analyst report for GPS Participações e Empreendimentos .

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

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 15% from 21% 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.

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 60% to shareholders over the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

While GPS Participações e Empreendimentos doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for GGPS3 on our platform.

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. 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.