EZTEC Empreendimentos e Participações (BVMF:EZTC3) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Although, when we looked at EZTEC Empreendimentos e Participações (BVMF:EZTC3), 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. Analysts use this formula to calculate it for EZTEC Empreendimentos e Participações:

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

0.032 = R$164m ÷ (R$5.5b - R$435m) (Based on the trailing twelve months to September 2022).

Therefore, EZTEC Empreendimentos e Participações has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 5.3%.

Check out our latest analysis for EZTEC Empreendimentos e Participações

Above you can see how the current ROCE for EZTEC Empreendimentos e Participações compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering EZTEC Empreendimentos e Participações here for free.

What Can We Tell From EZTEC Empreendimentos e Participações' ROCE Trend?

On the surface, the trend of ROCE at EZTEC Empreendimentos e Participações doesn't inspire confidence. To be more specific, ROCE has fallen from 11% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On EZTEC Empreendimentos e Participações' ROCE

In summary, EZTEC Empreendimentos e Participações is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 22% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing EZTEC Empreendimentos e Participações that you might find interesting.

While EZTEC Empreendimentos e Participações isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.