We're Watching These Trends At Instituto Hermes Pardini (BVMF:PARD3)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Instituto Hermes Pardini (BVMF:PARD3) and its ROCE trend, we weren't exactly thrilled.

What is 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. To calculate this metric for Instituto Hermes Pardini, this is the formula:

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

0.13 = R$185m ÷ (R$2.0b - R$523m) (Based on the trailing twelve months to September 2020).

Thus, Instituto Hermes Pardini has an ROCE of 13%. That's a pretty standard return and it's in line with the industry average of 13%.

Check out our latest analysis for Instituto Hermes Pardini

Above you can see how the current ROCE for Instituto Hermes Pardini compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

In terms of Instituto Hermes Pardini's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 13% from 24% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that Instituto Hermes Pardini is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 29% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Like most companies, Instituto Hermes Pardini does come with some risks, and we've found 1 warning sign that you should be aware of.

While Instituto Hermes Pardini isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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