Returns At Enauta Participações (BVMF:ENAT3) Are On The Way Up

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in Enauta Participações' (BVMF:ENAT3) returns on capital, so let's have a look.

What Is 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. To calculate this metric for Enauta Participações, this is the formula:

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

0.11 = R$725m ÷ (R$8.3b - R$1.7b) (Based on the trailing twelve months to December 2022).

Therefore, Enauta Participações has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Oil and Gas industry average of 10%.

Check out our latest analysis for Enauta Participações

In the above chart we have measured Enauta Participações' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Enauta Participações.

The Trend Of ROCE

We like the trends that we're seeing from Enauta Participações. The data shows that returns on capital have increased substantially over the last five years to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 81% more capital is being employed now too. So we're very much inspired by what we're seeing at Enauta Participações thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 21% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Enauta Participações has. Since the stock has returned a solid 45% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One final note, you should learn about the 2 warning signs we've spotted with Enauta Participações (including 1 which is significant) .

While Enauta Participações may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.