Some Investors May Be Worried About Três Tentos Agroindustrial S/A's (BVMF:TTEN3) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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. 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)

0.14 = R$552m ÷ (R$6.6b - R$2.8b) (Based on the trailing twelve months to September 2023).

Thus, Três Tentos Agroindustrial S/A has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.6% generated by the Food industry.

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 to see what analysts are forecasting going forward, you should check out our free report for Três Tentos Agroindustrial S/A.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Três Tentos Agroindustrial S/A doesn't inspire confidence. Over the last five years, returns on capital have decreased to 14% from 42% 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 related note, Três Tentos Agroindustrial S/A has decreased its current liabilities to 42% 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. 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. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

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 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.