CVC Brasil Operadora e Agência de Viagens (BVMF:CVCB3) Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at CVC Brasil Operadora e Agência de Viagens (BVMF:CVCB3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for CVC Brasil Operadora e Agência de Viagens:

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

0.11 = R$223m ÷ (R$5.3b - R$3.3b) (Based on the trailing twelve months to September 2021).

So, CVC Brasil Operadora e Agência de Viagens has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 4.2% generated by the Hospitality industry.

View 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 here for free.

So How Is CVC Brasil Operadora e Agência de Viagens' ROCE Trending?

When we looked at the ROCE trend at CVC Brasil Operadora e Agência de Viagens, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 11% from 45% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, CVC Brasil Operadora e Agência de Viagens' current liabilities are still rather high at 62% 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

We're a bit apprehensive about CVC Brasil Operadora e Agência de Viagens because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 42% from where it was five years ago. 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 come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

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.