Returns On Capital Signal Tricky Times Ahead For Três Tentos Agroindustrial S/A (BVMF:TTEN3)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at Três Tentos Agroindustrial S/A (BVMF:TTEN3) and its ROCE trend, we weren't exactly thrilled.

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

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. 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$855m ÷ (R$8.5b - R$3.6b) (Based on the trailing twelve months to June 2024).

So, Três Tentos Agroindustrial S/A has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 12% generated by the Food industry.

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're interested, you can view the analysts predictions in our free analyst report for Três Tentos Agroindustrial S/A .

So How Is Três Tentos Agroindustrial S/A's ROCE Trending?

On the surface, the trend of ROCE at Três Tentos Agroindustrial S/A doesn't inspire confidence. Around five years ago the returns on capital were 34%, 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 side note, Três Tentos Agroindustrial S/A has done well to pay down its current liabilities to 42% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 42% is still pretty high, so those risks are still somewhat prevalent.

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. Furthermore the stock has climbed 23% over the last three years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

While Três Tentos Agroindustrial S/A doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for TTEN3 on our platform.

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.