M. Dias Branco Indústria e Comércio de Alimentos (BVMF:MDIA3) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. However, after briefly looking over the numbers, we don't think M. Dias Branco Indústria e Comércio de Alimentos (BVMF:MDIA3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 M. Dias Branco Indústria e Comércio de Alimentos:

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

0.081 = R$720m ÷ (R$11b - R$2.3b) (Based on the trailing twelve months to September 2022).

Therefore, M. Dias Branco Indústria e Comércio de Alimentos has an ROCE of 8.1%. Ultimately, that's a low return and it under-performs the Food industry average of 12%.

Check out 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

When we looked at the ROCE trend at M. Dias Branco Indústria e Comércio de Alimentos, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.1% from 17% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, M. Dias Branco Indústria e Comércio de Alimentos' current liabilities have increased over the last five years to 21% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 8.1%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On M. Dias Branco Indústria e Comércio de Alimentos' ROCE

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. These growth trends haven't led to growth returns though, since the stock has fallen 11% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

M. Dias Branco Indústria e Comércio de Alimentos could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

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.