Diagnósticos da América (BVMF:DASA3) Might Be Having Difficulty Using Its Capital Effectively

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Diagnósticos da América (BVMF:DASA3), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.005 = R$66m ÷ (R$18b - R$4.7b) (Based on the trailing twelve months to June 2021).

Thus, Diagnósticos da América has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 9.3%.

View 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'd like, you can check out the forecasts from the analysts covering Diagnósticos da América here for free.

What The Trend Of ROCE Can Tell Us

In terms of Diagnósticos da América's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.5% from 5.9% five years ago. 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.

On a side note, Diagnósticos da América's current liabilities have increased over the last five years to 26% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 0.5%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

In Conclusion...

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 long term investors must be optimistic going forward because the stock has returned a huge 123% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 3 warning signs we've spotted with Diagnósticos da América (including 1 which is a bit unpleasant) .

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.

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.

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