Investors Could Be Concerned With BrasilAgro - Companhia Brasileira de Propriedades Agrícolas' (BVMF:AGRO3) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at BrasilAgro - Companhia Brasileira de Propriedades Agrícolas (BVMF:AGRO3) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for BrasilAgro - Companhia Brasileira de Propriedades Agrícolas:

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

0.073 = R$211m ÷ (R$3.5b - R$632m) (Based on the trailing twelve months to June 2023).

So, BrasilAgro - Companhia Brasileira de Propriedades Agrícolas has an ROCE of 7.3%. In absolute terms, that's a low return but it's around the Food industry average of 8.1%.

Check out our latest analysis for BrasilAgro - Companhia Brasileira de Propriedades Agrícolas

In the above chart we have measured BrasilAgro - Companhia Brasileira de Propriedades Agrícolas' 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 BrasilAgro - Companhia Brasileira de Propriedades Agrícolas here for free.

So How Is BrasilAgro - Companhia Brasileira de Propriedades Agrícolas' ROCE Trending?

When we looked at the ROCE trend at BrasilAgro - Companhia Brasileira de Propriedades Agrícolas, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.3% from 11% 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.

Our Take On BrasilAgro - Companhia Brasileira de Propriedades Agrícolas' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for BrasilAgro - Companhia Brasileira de Propriedades Agrícolas have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 159% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

BrasilAgro - Companhia Brasileira de Propriedades Agrícolas does have some risks, we noticed 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.