d1000 Varejo Farma Participações (BVMF:DMVF3) Shareholders Will Want The ROCE Trajectory To Continue

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, d1000 Varejo Farma Participações (BVMF:DMVF3) looks quite promising in regards to its trends of return on capital.

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 d1000 Varejo Farma Participações is:

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

0.038 = R$43m ÷ (R$1.5b - R$350m) (Based on the trailing twelve months to March 2023).

Thus, d1000 Varejo Farma Participações has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 11%.

Check out our latest analysis for d1000 Varejo Farma 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're interested in investigating d1000 Varejo Farma Participações' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is d1000 Varejo Farma Participações' ROCE Trending?

d1000 Varejo Farma Participações has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 3.8% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, d1000 Varejo Farma Participações is utilizing 104% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, d1000 Varejo Farma Participações has decreased current liabilities to 24% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

In summary, it's great to see that d1000 Varejo Farma Participações has managed to break into profitability and is continuing to reinvest in its business. And with a respectable 33% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

d1000 Varejo Farma Participações does have some risks though, and we've spotted 1 warning sign for d1000 Varejo Farma Participações that you might be interested in.

While d1000 Varejo Farma Participações 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.