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

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. 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.

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. 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)

0.076 = R$695m ÷ (R$12b - R$2.5b) (Based on the trailing twelve months to June 2023).

So, M. Dias Branco Indústria e Comércio de Alimentos has an ROCE of 7.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.1%.

See 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.

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. To be more specific, ROCE has fallen from 13% 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. If these investments prove successful, this can bode very well for long term stock performance.

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, 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. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Like most companies, M. Dias Branco Indústria e Comércio de Alimentos does come with some risks, and we've found 1 warning sign that 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.