Here's What's Concerning About GPS Participações e Empreendimentos' (BVMF:GGPS3) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at GPS Participações e Empreendimentos (BVMF:GGPS3), it didn't seem to tick all of these boxes.

What Is 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. Analysts use this formula to calculate it for GPS Participações e Empreendimentos:

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

0.11 = R$1.2b ÷ (R$14b - R$3.1b) (Based on the trailing twelve months to June 2024).

Therefore, GPS Participações e Empreendimentos has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.

See 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 analyst report for GPS Participações e Empreendimentos .

So How Is GPS Participações e Empreendimentos' ROCE Trending?

On the surface, the trend of ROCE at GPS Participações e Empreendimentos doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. 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. In light of this, the stock has only gained 12% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing to note, we've identified 1 warning sign with GPS Participações e Empreendimentos and understanding it should be part of your investment process.

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.