The Returns At EZTEC Empreendimentos e Participações (BVMF:EZTC3) Aren't Growing

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at EZTEC Empreendimentos e Participações (BVMF:EZTC3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 EZTEC Empreendimentos e Participações, this is the formula:

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

0.055 = R$253m ÷ (R$4.9b - R$315m) (Based on the trailing twelve months to June 2021).

Thus, EZTEC Empreendimentos e Participações has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 10%.

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 to see what analysts are forecasting going forward, you should check out our free report for EZTEC Empreendimentos e Participações.

The Trend Of ROCE

In terms of EZTEC Empreendimentos e Participações' historical ROCE trend, it doesn't exactly demand attention. The company has employed 52% more capital in the last five years, and the returns on that capital have remained stable at 5.5%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

In summary, EZTEC Empreendimentos e Participações has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 137% return in the last five years, so the market appears to be rosy about its future. 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.

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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.
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