Três Tentos Agroindustrial S/A (BVMF:TTEN3) Will Be Hoping To Turn Its Returns On Capital Around

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Três Tentos Agroindustrial S/A (BVMF:TTEN3), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Três Tentos Agroindustrial S/A, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.11 = R$442m ÷ (R$6.9b - R$2.8b) (Based on the trailing twelve months to December 2023).

Therefore, Três Tentos Agroindustrial S/A has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.4% generated by the Food industry.

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

The Trend Of ROCE

On the surface, the trend of ROCE at Três Tentos Agroindustrial S/A doesn't inspire confidence. To be more specific, ROCE has fallen from 43% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. 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. That could partly explain why the ROCE has dropped. 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. 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

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Três Tentos Agroindustrial S/A. And there could be an opportunity here if other metrics look good too, because the stock has declined 19% in 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're still interested in Três Tentos Agroindustrial S/A it's worth checking out our FREE intrinsic value approximation for TTEN3 to see if it's trading at an attractive price in other respects.

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.