Here's What's Concerning About Três Tentos Agroindustrial S/A's (BVMF:TTEN3) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. In light of that, when we looked at Três Tentos Agroindustrial S/A (BVMF:TTEN3) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Três Tentos Agroindustrial S/A is:

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

0.12 = R$388m ÷ (R$5.5b - R$2.4b) (Based on the trailing twelve months to September 2022).

Thus, Três Tentos Agroindustrial S/A has an ROCE of 12%. 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 Três Tentos Agroindustrial S/A 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 Três Tentos Agroindustrial S/A.

The Trend Of ROCE

When we looked at the ROCE trend at Três Tentos Agroindustrial S/A, we didn't gain much confidence. To be more specific, ROCE has fallen from 35% over the last five years. 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 44% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

What We Can Learn From Três Tentos Agroindustrial S/A's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Três Tentos Agroindustrial S/A is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 26% to shareholders over the last year. 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.

Três Tentos Agroindustrial S/A 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.

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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.