Diagnósticos da América (BVMF:DASA3) May Have Issues Allocating Its Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 Diagnósticos da América (BVMF:DASA3), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Diagnósticos da América:

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

0.049 = R$1.0b ÷ (R$27b - R$6.2b) (Based on the trailing twelve months to December 2022).

So, Diagnósticos da América has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 9.6%.

View our latest analysis for Diagnósticos da América

Above you can see how the current ROCE for Diagnósticos da América 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 Diagnósticos da América.

SWOT Analysis for Diagnósticos da América

What Does the ROCE Trend For Diagnósticos da América Tell Us?

On the surface, the trend of ROCE at Diagnósticos da América doesn't inspire confidence. Around five years ago the returns on capital were 7.1%, but since then they've fallen to 4.9%. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Diagnósticos da América'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 Diagnósticos da América. And there could be an opportunity here if other metrics look good too, because the stock has declined 68% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 2 warning signs we've spotted with Diagnósticos da América (including 1 which is potentially serious) .

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.