We're Watching These Trends At Direcional Engenharia (BVMF:DIRR3)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Direcional Engenharia (BVMF:DIRR3), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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 Direcional Engenharia, this is the formula:

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

0.04 = R$188m ÷ (R$5.2b - R$548m) (Based on the trailing twelve months to September 2020).

Thus, Direcional Engenharia has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 7.7%.

See our latest analysis for Direcional Engenharia

In the above chart we have measured Direcional Engenharia's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Direcional Engenharia.

The Trend Of ROCE

When we looked at the ROCE trend at Direcional Engenharia, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.0% from 5.9% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Direcional Engenharia's ROCE

In summary, Direcional Engenharia is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 164% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing Direcional Engenharia we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

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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