Here's What To Make Of CM Hospitalar S/A's (BVMF:VVEO3) Decelerating Rates Of Return

What trends should we look for it we want to identify stocks that can 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at CM Hospitalar S/A (BVMF:VVEO3) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on CM Hospitalar S/A is:

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

0.095 = R$667m ÷ (R$10.0b - R$2.9b) (Based on the trailing twelve months to September 2023).

Thus, CM Hospitalar S/A has an ROCE of 9.5%. On its own, that's a low figure but it's around the 10% average generated by the Healthcare industry.

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.

What Does the ROCE Trend For CM Hospitalar S/A Tell Us?

The returns on capital haven't changed much for CM Hospitalar S/A in recent years. The company has consistently earned 9.5% for the last five years, and the capital employed within the business has risen 513% 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.

On a side note, CM Hospitalar S/A has done well to reduce current liabilities to 29% of total assets over the last five years. 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.

Our Take On CM Hospitalar S/A's ROCE

Long story short, while CM Hospitalar S/A has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly then, the total return to shareholders over the last year has been flat. Therefore based on the analysis done in this article, we don't think CM Hospitalar S/A has the makings of a multi-bagger.

On a final note, we found 4 warning signs for CM Hospitalar S/A (1 is a bit unpleasant) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.