M. Dias Branco Indústria e Comércio de Alimentos (BVMF:MDIA3) Might Be Having Difficulty Using Its Capital Effectively

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at M. Dias Branco Indústria e Comércio de Alimentos (BVMF:MDIA3), it didn't seem to tick all of these boxes.

Understanding 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. 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)

0.079 = R$694m ÷ (R$11b - R$1.8b) (Based on the trailing twelve months to June 2022).

Therefore, M. Dias Branco Indústria e Comércio de Alimentos has an ROCE of 7.9%. Ultimately, that's a low return and it under-performs the Food industry average of 13%.

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 19%, but since then they've fallen to 7.9%. 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.

The Bottom Line On M. Dias Branco Indústria e Comércio de Alimentos' ROCE

While returns have fallen for M. Dias Branco Indústria e Comércio de Alimentos in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by 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 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.