Some Investors May Be Worried About Smartfit Escola de Ginástica e Dança's (BVMF:SMFT3) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Smartfit Escola de Ginástica e Dança (BVMF:SMFT3), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Smartfit Escola de Ginástica e Dança:

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

0.025 = R$259m ÷ (R$12b - R$1.7b) (Based on the trailing twelve months to December 2022).

Therefore, Smartfit Escola de Ginástica e Dança has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 8.8%.

View our latest analysis for Smartfit Escola de Ginástica e Dança

In the above chart we have measured Smartfit Escola de Ginástica e Dança's 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 Smartfit Escola de Ginástica e Dança here for free.

What Does the ROCE Trend For Smartfit Escola de Ginástica e Dança Tell Us?

In terms of Smartfit Escola de Ginástica e Dança's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.5% from 3.4% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Smartfit Escola de Ginástica e Dança has decreased its current liabilities to 15% of total assets. That could partly explain why the ROCE has dropped. 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.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Smartfit Escola de Ginástica e Dança. However, despite the promising trends, the stock has fallen 32% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Smartfit Escola de Ginástica e Dança could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Smartfit Escola de Ginástica e Dança 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.