If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at São Martinho (BVMF:SMTO3), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for São Martinho:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = R$1.3b ÷ (R$19b - R$3.0b) (Based on the trailing twelve months to December 2022).
Thus, São Martinho has an ROCE of 8.0%. In absolute terms, that's a low return and it also under-performs the Food industry average of 10.0%.
Check out our latest analysis for São Martinho
In the above chart we have measured São Martinho's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
SWOT Analysis for São Martinho
- Debt is well covered by earnings and cashflows.
- Dividends are covered by earnings and cash flows.
- Earnings declined over the past year.
- Dividend is low compared to the top 25% of dividend payers in the Food market.
- Expensive based on P/E ratio and estimated fair value.
- Annual revenue is forecast to grow faster than the Brazilian market.
- Annual earnings are forecast to grow slower than the Brazilian market.
What Can We Tell From São Martinho's ROCE Trend?
There are better returns on capital out there than what we're seeing at São Martinho. Over the past five years, ROCE has remained relatively flat at around 8.0% and the business has deployed 111% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
In Conclusion...
Long story short, while São Martinho has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 96% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
On a final note, we've found 3 warning signs for São Martinho that we think you should be aware of.
While São Martinho 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.
About BOVESPA:SMTO3
São Martinho
Engages in the production and sale of sugar, ethanol, and other sugarcane byproducts in Brazil.
Good value with adequate balance sheet and pays a dividend.
