Returns On Capital Signal Tricky Times Ahead For CM Hospitalar S/A (BVMF:VVEO3)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at CM Hospitalar S/A (BVMF:VVEO3), it didn't seem to tick all of these boxes.

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. 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)

0.053 = R$317m ÷ (R$8.3b - R$2.3b) (Based on the trailing twelve months to September 2022).

So, CM Hospitalar S/A has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 12%.

Check out our latest analysis for CM Hospitalar S/A

In the above chart we have measured CM Hospitalar S/A's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for CM Hospitalar S/A.

So How Is CM Hospitalar S/A's ROCE Trending?

On the surface, the trend of ROCE at CM Hospitalar S/A doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.3% from 16% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, CM Hospitalar S/A has done well to pay down its current liabilities to 28% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for CM Hospitalar S/A. And the stock has followed suit returning a meaningful 14% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing: We've identified 3 warning signs with CM Hospitalar S/A (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

While CM Hospitalar S/A may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.