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

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Três Tentos Agroindustrial S/A (BVMF:TTEN3), it didn't seem to tick all of these boxes.

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)

0.17 = R$602m ÷ (R$6.4b - R$2.9b) (Based on the trailing twelve months to March 2023).

So, Três Tentos Agroindustrial S/A has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 9.6% it's much better.

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

SWOT Analysis 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. Around five years ago the returns on capital were 40%, but since then they've fallen to 17%. 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 46% of total assets. So we could link some of this to the decrease in ROCE. 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.

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

One more thing to note, we've identified 1 warning sign with Três Tentos Agroindustrial S/A and understanding it should be part of your investment process.

While Três Tentos Agroindustrial S/A isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.