MPM Corpóreos (BVMF:ESPA3) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating MPM Corpóreos (BVMF:ESPA3), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on MPM Corpóreos is:

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

0.058 = R$98m ÷ (R$2.3b - R$624m) (Based on the trailing twelve months to March 2023).

Thus, MPM Corpóreos has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 8.2%.

View our latest analysis for MPM Corpóreos

In the above chart we have measured MPM Corpóreos' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For MPM Corpóreos Tell Us?

On the surface, the trend of ROCE at MPM Corpóreos doesn't inspire confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 5.8%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for MPM Corpóreos. And there could be an opportunity here if other metrics look good too, because the stock has declined 19% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

MPM Corpóreos does have some risks, we noticed 4 warning signs (and 2 which make us uncomfortable) we think you should know about.

While MPM Corpóreos 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.