There Are Reasons To Feel Uneasy About M. Dias Branco Indústria e Comércio de Alimentos' (BVMF:MDIA3) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. 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)?

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. 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)

0.059 = R$526m ÷ (R$10b - R$1.4b) (Based on the trailing twelve months to June 2021).

Therefore, M. Dias Branco Indústria e Comércio de Alimentos has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Food industry average of 14%.

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.

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

In terms of M. Dias Branco Indústria e Comércio de Alimentos' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 13%, but since then they've fallen to 5.9%. 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 may take some time before the company starts to see any change in earnings from these investments.

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

In summary, M. Dias Branco Indústria e Comércio de Alimentos is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 28% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think M. Dias Branco Indústria e Comércio de Alimentos has the makings of a multi-bagger.

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.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.

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