Stock Analysis

Dexxos Participações (BVMF:DEXP3) Knows How To Allocate Capital Effectively

BOVESPA:DEXP3
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of Dexxos Participações (BVMF:DEXP3) we really liked what we saw.

Understanding 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. Analysts use this formula to calculate it for Dexxos Participações:

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

0.29 = R$246m ÷ (R$1.2b - R$343m) (Based on the trailing twelve months to September 2021).

So, Dexxos Participações has an ROCE of 29%. While that is an outstanding return, the rest of the Chemicals industry generates similar returns, on average.

Check out our latest analysis for Dexxos Participações

roce
BOVESPA:DEXP3 Return on Capital Employed January 5th 2022

Historical performance is a great place to start when researching a stock so above you can see the gauge for Dexxos Participações' ROCE against it's prior returns. If you're interested in investigating Dexxos Participações' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Dexxos Participações Tell Us?

Dexxos Participações is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 29%. The amount of capital employed has increased too, by 197%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 29%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line

To sum it up, Dexxos Participações has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 3 warning signs with Dexxos Participações (at least 1 which is concerning) , and understanding them would certainly be useful.

Dexxos Participações is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.