Orizon Valorização de Resíduos (BVMF:ORVR3) Has More To Do To Multiply In Value Going Forward

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Orizon Valorização de Resíduos (BVMF:ORVR3) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding 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. Analysts use this formula to calculate it for Orizon Valorização de Resíduos:

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

0.11 = R$115m ÷ (R$1.2b - R$204m) (Based on the trailing twelve months to March 2022).

Thus, Orizon Valorização de Resíduos has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 13% generated by the Commercial Services industry.

Check out our latest analysis for Orizon Valorização de Resíduos

In the above chart we have measured Orizon Valorização de Resíduos' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Orizon Valorização de Resíduos here for free.

So How Is Orizon Valorização de Resíduos' ROCE Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past four years, ROCE has remained relatively flat at around 11% and the business has deployed 774% more capital into its operations. 11% is a pretty standard return, and it provides some comfort knowing that Orizon Valorização de Resíduos has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

One more thing to note, even though ROCE has remained relatively flat over the last four years, the reduction in current liabilities to 17% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

What We Can Learn From Orizon Valorização de Resíduos' ROCE

In the end, Orizon Valorização de Resíduos has proven its ability to adequately reinvest capital at good rates of return. And since the stock has risen strongly over the last year, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Orizon Valorização de Resíduos could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

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.