EZTEC Empreendimentos e Participações (BVMF:EZTC3) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at EZTEC Empreendimentos e Participações (BVMF:EZTC3), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on EZTEC Empreendimentos e Participações is:

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

0.018 = R$92m ÷ (R$5.7b - R$453m) (Based on the trailing twelve months to June 2023).

Thus, EZTEC Empreendimentos e Participações has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 8.6%.

See 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.

The Trend Of ROCE

When we looked at the ROCE trend at EZTEC Empreendimentos e Participações, we didn't gain much confidence. Around five years ago the returns on capital were 8.6%, but since then they've fallen to 1.8%. However it looks like EZTEC Empreendimentos e Participações might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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 EZTEC Empreendimentos e Participações' ROCE

Bringing it all together, while we're somewhat encouraged by EZTEC Empreendimentos e Participações' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 78% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know about the risks facing EZTEC Empreendimentos e Participações, we've discovered 1 warning sign that you should be aware of.

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.