Here's What's Concerning About M. Dias Branco Indústria e Comércio de Alimentos' (BVMF:MDIA3) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at M. Dias Branco Indústria e Comércio de Alimentos (BVMF:MDIA3) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on M. Dias Branco Indústria e Comércio de Alimentos is:

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

0.058 = R$492m ÷ (R$10.0b - R$1.4b) (Based on the trailing twelve months to March 2022).

Thus, M. Dias Branco Indústria e Comércio de Alimentos has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Food industry average of 15%.

View our latest analysis for M. Dias Branco Indústria e Comércio de Alimentos

Above you can see how the current ROCE for M. Dias Branco Indústria e Comércio de Alimentos compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for M. Dias Branco Indústria e Comércio de Alimentos.

What Does the ROCE Trend For M. Dias Branco Indústria e Comércio de Alimentos Tell Us?

In terms of M. Dias Branco Indústria e Comércio de Alimentos' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 19% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that M. Dias Branco Indústria e Comércio de Alimentos is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 44% over the last five years, 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.

On a final note, we've found 1 warning sign for M. Dias Branco Indústria e Comércio de Alimentos that we think you should be aware of.

While M. Dias Branco Indústria e Comércio de Alimentos 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.