Capital Allocation Trends At Três Tentos Agroindustrial S/A (BVMF:TTEN3) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after investigating Três Tentos Agroindustrial S/A (BVMF:TTEN3), we don't think it's current trends fit the mold of a multi-bagger.

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

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. Analysts use this formula to calculate it for Três Tentos Agroindustrial S/A:

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

0.16 = R$538m ÷ (R$6.1b - R$2.7b) (Based on the trailing twelve months to December 2022).

So, Três Tentos Agroindustrial S/A has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Food industry.

Check out our latest analysis for Três Tentos Agroindustrial S/A

In the above chart we have measured Três Tentos Agroindustrial S/A's 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 Três Tentos Agroindustrial S/A.

What Can We Tell From Três Tentos Agroindustrial S/A's ROCE Trend?

In terms of Três Tentos Agroindustrial S/A's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 38%, but since then they've fallen to 16%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Três Tentos Agroindustrial S/A has done well to pay down its current liabilities to 45% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Três Tentos Agroindustrial S/A. Furthermore the stock has climbed 32% over the last year, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing, we've spotted 1 warning sign facing Três Tentos Agroindustrial S/A that you might find interesting.

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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.