Investors Will Want Profarma Distribuidora de Produtos Farmacêuticos' (BVMF:PFRM3) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Profarma Distribuidora de Produtos Farmacêuticos' (BVMF:PFRM3) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Profarma Distribuidora de Produtos Farmacêuticos is:

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

0.12 = R$269m ÷ (R$4.8b - R$2.5b) (Based on the trailing twelve months to March 2023).

Therefore, Profarma Distribuidora de Produtos Farmacêuticos has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 9.1% it's much better.

View our latest analysis for Profarma Distribuidora de Produtos Farmacêuticos

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Profarma Distribuidora de Produtos Farmacêuticos has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Profarma Distribuidora de Produtos Farmacêuticos' ROCE Trend?

The fact that Profarma Distribuidora de Produtos Farmacêuticos is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 12% on its capital. Not only that, but the company is utilizing 79% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a separate but related note, it's important to know that Profarma Distribuidora de Produtos Farmacêuticos has a current liabilities to total assets ratio of 52%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

Overall, Profarma Distribuidora de Produtos Farmacêuticos gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing to note, we've identified 1 warning sign with Profarma Distribuidora de Produtos Farmacêuticos and understanding this should be part of your investment process.

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.