MRV Engenharia e Participações (BVMF:MRVE3) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. In light of that, when we looked at MRV Engenharia e Participações (BVMF:MRVE3) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on MRV Engenharia e Participações is:

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

0.055 = R$819m ÷ (R$19b - R$3.8b) (Based on the trailing twelve months to March 2021).

Thus, MRV Engenharia 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 9.8%.

See our latest analysis for MRV Engenharia e Participações

In the above chart we have measured MRV Engenharia e Participações' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for MRV Engenharia e Participações.

What Can We Tell From MRV Engenharia e Participações' ROCE Trend?

In terms of MRV Engenharia e Participações' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.7%, but since then they've fallen to 5.5%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that MRV Engenharia e Participações is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 105% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for MRV Engenharia e Participações (of which 1 shouldn't be ignored!) that you should know about.

While MRV Engenharia 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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