Plano & Plano Desenvolvimento Imobiliário (BVMF:PLPL3) Will Want To Turn Around Its Return Trends

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. 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 Plano & Plano Desenvolvimento Imobiliário (BVMF:PLPL3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Plano & Plano Desenvolvimento Imobiliário is:

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

0.11 = R$131m ÷ (R$1.5b - R$286m) (Based on the trailing twelve months to September 2022).

So, Plano & Plano Desenvolvimento Imobiliário has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 5.3% generated by the Consumer Durables industry.

Check out our latest analysis for Plano & Plano Desenvolvimento Imobiliário

In the above chart we have measured Plano & Plano Desenvolvimento Imobiliário's 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 Plano & Plano Desenvolvimento Imobiliário here for free.

How Are Returns Trending?

When we looked at the ROCE trend at Plano & Plano Desenvolvimento Imobiliário, we didn't gain much confidence. Around four years ago the returns on capital were 15%, but since then they've fallen to 11%. However it looks like Plano & Plano Desenvolvimento Imobiliário 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Plano & Plano Desenvolvimento Imobiliário's ROCE

To conclude, we've found that Plano & Plano Desenvolvimento Imobiliário is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 21% over the last year, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Plano & Plano Desenvolvimento Imobiliário does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are significant...

While Plano & Plano Desenvolvimento Imobiliário 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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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.