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

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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 MRV Engenharia e Participações (BVMF:MRVE3), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.053 = R$806m ÷ (R$19b - R$4.1b) (Based on the trailing twelve months to June 2021).

Therefore, MRV Engenharia e Participações has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 10%.

View 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?

On the surface, the trend of ROCE at MRV Engenharia e Participações doesn't inspire confidence. To be more specific, ROCE has fallen from 7.4% 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for MRV Engenharia e Participações. These trends are starting to be recognized by investors since the stock has delivered a 24% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for MRV Engenharia e Participações (of which 1 makes us a bit uncomfortable!) 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.

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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