Returns On Capital At Três Tentos Agroindustrial S/A (BVMF:TTEN3) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Três Tentos Agroindustrial S/A (BVMF:TTEN3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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$350m ÷ (R$5.0b - R$2.0b) (Based on the trailing twelve months to March 2022).

So, Três Tentos Agroindustrial S/A has an ROCE of 12%. In absolute terms, that's a pretty standard return but compared to the Food industry average it falls behind.

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

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, you can check out the forecasts from the analysts covering Três Tentos Agroindustrial S/A here for free.

The Trend Of ROCE

In terms of Três Tentos Agroindustrial S/A's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 12% from 34% 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. 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 40% of total assets. So we could link some of this to the decrease in ROCE. 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.

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

While returns have fallen for Três Tentos Agroindustrial S/A in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 26% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to continue researching Três Tentos Agroindustrial S/A, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Três Tentos Agroindustrial S/A 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.