Capital Allocation Trends At Trisul (BVMF:TRIS3) Aren't Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Trisul (BVMF:TRIS3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Trisul is:

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

0.057 = R$113m ÷ (R$2.8b - R$766m) (Based on the trailing twelve months to December 2023).

Thus, Trisul has an ROCE of 5.7%. Even though it's in line with the industry average of 5.8%, it's still a low return by itself.

View our latest analysis for Trisul

In the above chart we have measured Trisul's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Trisul .

The Trend Of ROCE

When we looked at the ROCE trend at Trisul, we didn't gain much confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 5.7%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Trisul's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Trisul. In light of this, the stock has only gained 23% 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.

If you want to continue researching Trisul, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Trisul 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.