Investors Could Be Concerned With Três Tentos Agroindustrial S/A's (BVMF:TTEN3) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. 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 Três Tentos Agroindustrial S/A (BVMF:TTEN3), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.20 = R$1.0b ÷ (R$8.5b - R$3.4b) (Based on the trailing twelve months to September 2024).

So, Três Tentos Agroindustrial S/A has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Food industry average of 9.8%.

See 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 analyst report for Três Tentos Agroindustrial S/A .

How Are Returns Trending?

When we looked at the ROCE trend at Três Tentos Agroindustrial S/A, we didn't gain much confidence. To be more specific, while the ROCE is still high, it's fallen from 31% where it was five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Três Tentos Agroindustrial S/A has decreased its current liabilities to 40% 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.

The Key Takeaway

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 62% to shareholders over the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a separate note, we've found 1 warning sign for Três Tentos Agroindustrial S/A you'll probably want to know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.