MRV Engenharia e Participações (BVMF:MRVE3) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at MRV Engenharia e Participações (BVMF:MRVE3) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. 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)

0.056 = R$811m ÷ (R$18b - R$3.6b) (Based on the trailing twelve months to December 2020).

Therefore, MRV Engenharia e Participações has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 8.0%.

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'd like to see what analysts are forecasting going forward, you should check out our free report for MRV Engenharia e Participações.

What Does the ROCE Trend For MRV Engenharia e Participações Tell Us?

When we looked at the ROCE trend at MRV Engenharia e Participações, we didn't gain much confidence. To be more specific, ROCE has fallen from 7.9% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, MRV Engenharia e Participações is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 91% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

MRV Engenharia e Participações does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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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