CVC Brasil Operadora e Agência de Viagens (BVMF:CVCB3) Has Some Difficulty Using Its Capital Effectively

When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, CVC Brasil Operadora e Agência de Viagens (BVMF:CVCB3) we aren't filled with optimism, but let's investigate further.

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. The formula for this calculation on CVC Brasil Operadora e Agência de Viagens is:

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

0.049 = R$70m ÷ (R$3.9b - R$2.5b) (Based on the trailing twelve months to September 2024).

Therefore, CVC Brasil Operadora e Agência de Viagens has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 8.3%.

Check out our latest analysis for CVC Brasil Operadora e Agência de Viagens

Above you can see how the current ROCE for CVC Brasil Operadora e Agência de Viagens compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering CVC Brasil Operadora e Agência de Viagens for free.

What Does the ROCE Trend For CVC Brasil Operadora e Agência de Viagens Tell Us?

We are a bit anxious about the trends of ROCE at CVC Brasil Operadora e Agência de Viagens. The company used to generate 9.4% on its capital five years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 60% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, CVC Brasil Operadora e Agência de Viagens' current liabilities have increased over the last five years to 64% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On CVC Brasil Operadora e Agência de Viagens' ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Unsurprisingly then, the stock has dived 94% over the last five years, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

CVC Brasil Operadora e Agência de Viagens does have some risks though, and we've spotted 1 warning sign for CVC Brasil Operadora e Agência de Viagens that you might be interested in.

While CVC Brasil Operadora e Agência de Viagens may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.