Cambuci (BVMF:CAMB3) Is Doing The Right Things To Multiply Its Share Price

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. So when we looked at Cambuci (BVMF:CAMB3) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Cambuci, this is the formula:

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

0.085 = R$15m ÷ (R$276m - R$104m) (Based on the trailing twelve months to March 2021).

Therefore, Cambuci has an ROCE of 8.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.5%.

See our latest analysis for Cambuci

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cambuci's ROCE against it's prior returns. If you're interested in investigating Cambuci's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Cambuci Tell Us?

We're delighted to see that Cambuci is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 8.5% on its capital. And unsurprisingly, like most companies trying to break into the black, Cambuci is utilizing 2,102% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 38%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Cambuci has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Cambuci's ROCE

Long story short, we're delighted to see that Cambuci's reinvestment activities have paid off and the company is now profitable. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 95% return over the last year. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 2 warning signs with Cambuci (at least 1 which is significant) , and understanding them would certainly be useful.

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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