Returns On Capital At MRV Engenharia e Participações (BVMF:MRVE3) Paint An Interesting Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for MRV Engenharia e Participações:

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

0.051 = R$721m ÷ (R$18b - R$3.4b) (Based on the trailing twelve months to September 2020).

Therefore, MRV Engenharia e Participações has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 8.2%.

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, you can check out the forecasts from the analysts covering MRV Engenharia e Participações here for free.

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. Over the last five years, returns on capital have decreased to 5.1% from 7.6% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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. Yet to long term shareholders the stock has gifted them an incredible 188% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One final note, you should learn about the 4 warning signs we've spotted with MRV Engenharia e Participações (including 1 which is can't be ignored) .

While MRV Engenharia e Participações may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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