CVC Brasil Operadora e Agência de Viagens (BVMF:CVCB3) Is Reinvesting At Lower Rates Of Return

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think CVC Brasil Operadora e Agência de Viagens (BVMF:CVCB3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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)

0.0053 = R$8.8m ÷ (R$4.7b - R$3.1b) (Based on the trailing twelve months to June 2021).

Therefore, CVC Brasil Operadora e Agência de Viagens has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 2.3%.

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

In the above chart we have measured CVC Brasil Operadora e Agência de Viagens' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering CVC Brasil Operadora e Agência de Viagens here for free.

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

On the surface, the trend of ROCE at CVC Brasil Operadora e Agência de Viagens doesn't inspire confidence. Around five years ago the returns on capital were 46%, but since then they've fallen to 0.5%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, CVC Brasil Operadora e Agência de Viagens' current liabilities are still rather high at 65% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

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

From the above analysis, we find it rather worrisome that returns on capital and sales for CVC Brasil Operadora e Agência de Viagens have fallen, meanwhile the business is employing more capital than it was five years ago. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing, we've spotted 2 warning signs facing CVC Brasil Operadora e Agência de Viagens that you might find interesting.

While CVC Brasil Operadora e Agência de Viagens isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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