Some Investors May Be Worried About Grupo Mateus' (BVMF:GMAT3) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Grupo Mateus (BVMF:GMAT3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Grupo Mateus:

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

0.12 = R$1.3b ÷ (R$13b - R$2.8b) (Based on the trailing twelve months to December 2022).

Therefore, Grupo Mateus has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Retailing industry average of 11%.

Check out our latest analysis for Grupo Mateus

In the above chart we have measured Grupo Mateus' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Grupo Mateus.

How Are Returns Trending?

On the surface, the trend of ROCE at Grupo Mateus doesn't inspire confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 12%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Grupo Mateus has done well to pay down its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Grupo Mateus' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Grupo Mateus is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 3.8% over the last year. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

While Grupo Mateus doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

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.