Be Wary Of MRV Engenharia e Participações (BVMF:MRVE3) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at MRV Engenharia e Participações (BVMF:MRVE3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for MRV Engenharia e Participações, this is the formula:

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

0.017 = R$298m ÷ (R$22b - R$4.5b) (Based on the trailing twelve months to June 2022).

Therefore, MRV Engenharia e Participações has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 6.0%.

Check out our latest analysis for MRV Engenharia e Participações

Above you can see how the current ROCE for MRV Engenharia e Participações compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at MRV Engenharia e Participações doesn't inspire confidence. Around five years ago the returns on capital were 5.4%, but since then they've fallen to 1.7%. However it looks like MRV Engenharia 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On MRV Engenharia e Participações' ROCE

To conclude, we've found that MRV Engenharia e Participações is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 9.8% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing: We've identified 4 warning signs with MRV Engenharia e Participações (at least 1 which is concerning) , and understanding these would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.