Returns Are Gaining Momentum At Cambuci (BVMF:CAMB3)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Cambuci (BVMF:CAMB3) so let's look a bit deeper.

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

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

0.19 = R$33m ÷ (R$268m - R$92m) (Based on the trailing twelve months to June 2021).

Thus, Cambuci has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 13% it's much better.

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 want to delve into the historical earnings, revenue and cash flow of Cambuci, check out these free graphs here.

What The Trend Of ROCE Can 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 19% on its capital. In addition to that, Cambuci is employing 3,114% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, Cambuci has decreased current liabilities to 34% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

Overall, Cambuci gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 17% return over the last year. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Cambuci does have some risks, we noticed 4 warning signs (and 2 which make us uncomfortable) we think you should know about.

While Cambuci may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

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