Investors Could Be Concerned With M. Dias Branco Indústria e Comércio de Alimentos' (BVMF:MDIA3) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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)?

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. To calculate this metric for M. Dias Branco Indústria e Comércio de Alimentos, this is the formula:

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

0.052 = R$477m ÷ (R$11b - R$1.5b) (Based on the trailing twelve months to September 2021).

Thus, M. Dias Branco Indústria e Comércio de Alimentos has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Food industry average of 14%.

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, you can check out the forecasts from the analysts covering M. Dias Branco Indústria e Comércio de Alimentos here for free.

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

On the surface, the trend of ROCE at M. Dias Branco Indústria e Comércio de Alimentos doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 5.2%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From M. Dias Branco Indústria e Comércio de Alimentos' ROCE

To conclude, we've found that M. Dias Branco Indústria e Comércio de Alimentos is reinvesting in the business, but returns have been falling. Since the stock has declined 44% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to continue researching M. Dias Branco Indústria e Comércio de Alimentos, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.