M. Dias Branco Indústria e Comércio de Alimentos (BVMF:MDIA3) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.077 = R$688m ÷ (R$11b - R$2.3b) (Based on the trailing twelve months to March 2023).

So, M. Dias Branco Indústria e Comércio de Alimentos has an ROCE of 7.7%. Ultimately, that's a low return and it under-performs the Food industry average of 10%.

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

In the above chart we have measured M. Dias Branco Indústria e Comércio de Alimentos' 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 M. Dias Branco Indústria e Comércio de Alimentos.

SWOT Analysis for M. Dias Branco Indústria e Comércio de Alimentos

How Are Returns Trending?

On the surface, the trend of ROCE at M. Dias Branco Indústria e Comércio de Alimentos doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.7% from 14% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, M. Dias Branco Indústria e Comércio de Alimentos' current liabilities have increased over the last five years to 20% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From 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. In light of this, the stock has only gained 25% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

While M. Dias Branco Indústria e Comércio de Alimentos doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While M. Dias Branco Indústria e Comércio de Alimentos isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.