Returns At São Martinho (BVMF:SMTO3) Are On The Way Up

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at São Martinho (BVMF:SMTO3) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for São Martinho, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.14 = R$2.1b ÷ (R$18b - R$3.1b) (Based on the trailing twelve months to June 2022).

Therefore, São Martinho has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 13% generated by the Food industry.

Check out the opportunities and risks within the BR Food industry.

Above you can see how the current ROCE for São Martinho compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for São Martinho.

What Does the ROCE Trend For São Martinho Tell Us?

We like the trends that we're seeing from São Martinho. Over the last five years, returns on capital employed have risen substantially to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 100% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Our Take On São Martinho's ROCE

In summary, it's great to see that São Martinho can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 67% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing: We've identified 4 warning signs with São Martinho (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.