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

What trends should we look for it we want to identify stocks that can 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Diagnósticos da América (BVMF:DASA3), it didn't seem to tick all of these boxes.

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

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. The formula for this calculation on Diagnósticos da América is:

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

0.051 = R$1.0b ÷ (R$27b - R$6.4b) (Based on the trailing twelve months to September 2023).

So, Diagnósticos da América has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 10%.

Check out our latest analysis for Diagnósticos da América

In the above chart we have measured Diagnósticos da América'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 report on analyst forecasts for the company.

The Trend Of ROCE

When we looked at the ROCE trend at Diagnósticos da América, we didn't gain much confidence. Around five years ago the returns on capital were 8.7%, but since then they've fallen to 5.1%. 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.

What We Can Learn From Diagnósticos da América's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Diagnósticos da América is reinvesting for growth and has higher sales as a result. Despite these promising trends, the stock has collapsed 74% over the last five years, so there could be other factors hurting the company's prospects. Therefore, we'd suggest researching the stock further to uncover more about the business.

On a separate note, we've found 1 warning sign for Diagnósticos da América you'll probably want to know about.

While Diagnósticos da América may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.