Profarma Distribuidora de Produtos Farmacêuticos (BVMF:PFRM3) Might Have The Makings Of A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Profarma Distribuidora de Produtos Farmacêuticos (BVMF:PFRM3) and its trend of ROCE, we really liked what we saw.

What is 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. To calculate this metric for Profarma Distribuidora de Produtos Farmacêuticos, this is the formula:

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

0.058 = R$128m ÷ (R$3.8b - R$1.5b) (Based on the trailing twelve months to December 2020).

Therefore, Profarma Distribuidora de Produtos Farmacêuticos has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 14%.

Check out our latest analysis for Profarma Distribuidora de Produtos Farmacêuticos

Historical performance is a great place to start when researching a stock so above you can see the gauge for Profarma Distribuidora de Produtos Farmacêuticos' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Profarma Distribuidora de Produtos Farmacêuticos, check out these free graphs here.

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 5.8%. The amount of capital employed has increased too, by 102%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 41%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

What We Can Learn From Profarma Distribuidora de Produtos Farmacêuticos' ROCE

All in all, it's terrific to see that Profarma Distribuidora de Produtos Farmacêuticos is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 28% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Profarma Distribuidora de Produtos Farmacêuticos does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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. 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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