Our Take On The Returns On Capital At EZTEC Empreendimentos e Participações (BVMF:EZTC3)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating EZTEC Empreendimentos e Participações (BVMF:EZTC3), we don't think it's current trends fit the mold of a multi-bagger.

What is 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. To calculate this metric for EZTEC Empreendimentos e Participações, this is the formula:

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

0.056 = R$235m ÷ (R$4.5b - R$341m) (Based on the trailing twelve months to September 2020).

Therefore, EZTEC Empreendimentos e Participações has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 8.2%.

See our latest analysis for EZTEC Empreendimentos e Participações

In the above chart we have measured EZTEC Empreendimentos e Participações' prior ROCE against its prior performance, but the future is arguably more important. 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. To be more specific, ROCE has fallen from 10% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that EZTEC Empreendimentos e Participações is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 390% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

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. 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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