CM Hospitalar S/A (BVMF:VVEO3) Has More To Do To Multiply In Value Going Forward

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at CM Hospitalar S/A (BVMF:VVEO3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 CM Hospitalar S/A:

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

0.09 = R$568m ÷ (R$9.0b - R$2.6b) (Based on the trailing twelve months to March 2023).

So, CM Hospitalar S/A has an ROCE of 9.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.1%.

View our latest analysis for CM Hospitalar S/A

Above you can see how the current ROCE for CM Hospitalar S/A 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 CM Hospitalar S/A.

SWOT Analysis for CM Hospitalar S/A

How Are Returns Trending?

The returns on capital haven't changed much for CM Hospitalar S/A in recent years. The company has consistently earned 9.0% for the last five years, and the capital employed within the business has risen 582% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 29% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

What We Can Learn From CM Hospitalar S/A's ROCE

In conclusion, CM Hospitalar S/A has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 27% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we found 2 warning signs for CM Hospitalar S/A (1 is concerning) you should be aware of.

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.