When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Springs Global Participações (BVMF:SGPS3), we weren't too hopeful.
What is 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. To calculate this metric for Springs Global Participações, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = R$115m ÷ (R$3.1b - R$1.1b) (Based on the trailing twelve months to June 2021).
So, Springs Global Participações has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 9.7%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Springs Global Participações' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Springs Global Participações, check out these free graphs here.
What Can We Tell From Springs Global Participações' ROCE Trend?
We are a bit worried about the trend of returns on capital at Springs Global Participações. To be more specific, the ROCE was 9.5% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Springs Global Participações becoming one if things continue as they have.
What We Can Learn From Springs Global Participações' ROCE
In summary, it's unfortunate that Springs Global Participações is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 114% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
Springs Global Participações does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...
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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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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