Here's What To Make Of Springs Global Participações' (BVMF:SGPS3) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Springs Global Participações (BVMF:SGPS3), it didn't seem to tick all of these boxes.

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

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. Analysts use this formula to calculate it for Springs Global Participações:

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

0.021 = R$46m ÷ (R$3.1b - R$977m) (Based on the trailing twelve months to September 2020).

Thus, Springs Global Participações has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 8.2%.

Check out our latest analysis for Springs Global Participações

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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?

In terms of Springs Global Participações' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.1% from 8.1% five years ago. 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.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Springs Global Participações' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 145% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

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

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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