Returns On Capital At Diagnósticos da América (BVMF:DASA3) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Diagnósticos da América (BVMF:DASA3), it didn't seem to tick all of these boxes.

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

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

0.04 = R$780m ÷ (R$25b - R$5.6b) (Based on the trailing twelve months to September 2022).

So, Diagnósticos da América has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 12%.

Check out 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.

The Trend Of ROCE

In terms of Diagnósticos da América's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 6.7% over the last five years. 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.

The Key Takeaway

While returns have fallen for Diagnósticos da América in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 51% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Diagnósticos da América does have some risks, we noticed 3 warning signs (and 2 which are a bit unpleasant) we think you should 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.

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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.