We Like These Underlying Return On Capital Trends At Smartfit Escola de Ginástica e Dança (BVMF:SMFT3)

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. With that in mind, we've noticed some promising trends at Smartfit Escola de Ginástica e Dança (BVMF:SMFT3) so let's look a bit deeper.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Smartfit Escola de Ginástica e Dança, this is the formula:

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

0.089 = R$1.1b ÷ (R$15b - R$2.2b) (Based on the trailing twelve months to March 2024).

Therefore, Smartfit Escola de Ginástica e Dança has an ROCE of 8.9%. Even though it's in line with the industry average of 8.9%, it's still a low return by itself.

See our latest analysis for Smartfit Escola de Ginástica e Dança

Above you can see how the current ROCE for Smartfit Escola de Ginástica e Dança 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 Smartfit Escola de Ginástica e Dança for free.

What The Trend Of ROCE Can Tell Us

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 8.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 178% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Smartfit Escola de Ginástica e Dança's ROCE

To sum it up, Smartfit Escola de Ginástica e Dança has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 21% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Smartfit Escola de Ginástica e Dança can keep these trends up, it could have a bright future ahead.

Smartfit Escola de Ginástica e Dança does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.