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

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. 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.

Understanding 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. 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)

0.069 = R$617m ÷ (R$11b - R$2.5b) (Based on the trailing twelve months to December 2022).

Therefore, M. Dias Branco Indústria e Comércio de Alimentos has an ROCE of 6.9%. Ultimately, that's a low return and it under-performs the Food industry average of 9.0%.

See 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?

On the surface, the trend of ROCE at M. Dias Branco Indústria e Comércio de Alimentos doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last five years. 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 22% 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.

In Conclusion...

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 46% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you're still interested in M. Dias Branco Indústria e Comércio de Alimentos it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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.

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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.