What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Fertilizantes Heringer (BVMF:FHER3) looks attractive right now, so lets see what the trend of returns can tell us.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on Fertilizantes Heringer is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.38 = R$538m ÷ (R$2.4b - R$1.0b) (Based on the trailing twelve months to September 2021).
Thus, Fertilizantes Heringer has an ROCE of 38%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 29%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Fertilizantes Heringer's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Fertilizantes Heringer, check out these free graphs here.
What Does the ROCE Trend For Fertilizantes Heringer Tell Us?
We'd be pretty happy with returns on capital like Fertilizantes Heringer. Over the past five years, ROCE has remained relatively flat at around 38% and the business has deployed 302% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Fertilizantes Heringer can keep this up, we'd be very optimistic about its future.
On a side note, Fertilizantes Heringer has done well to reduce current liabilities to 42% 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. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.
Our Take On Fertilizantes Heringer's ROCE
Fertilizantes Heringer has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. On top of that, the stock has rewarded shareholders with a remarkable 939% return to those who've held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
On a final note, we found 4 warning signs for Fertilizantes Heringer (2 are potentially serious) you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.