Stock Analysis

Is Fertilizantes Heringer (BVMF:FHER3) Likely To Turn Things Around?

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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Fertilizantes Heringer (BVMF:FHER3) and its ROCE trend, we weren't exactly thrilled.

What is 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 Fertilizantes Heringer:

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

0.013 = R$13m ÷ (R$1.8b - R$790m) (Based on the trailing twelve months to September 2020).

So, Fertilizantes Heringer has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 9.2%.

See our latest analysis for Fertilizantes Heringer

BOVESPA:FHER3 Return on Capital Employed November 19th 2020

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'd like to look at how Fertilizantes Heringer has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Fertilizantes Heringer Tell Us?

When we looked at the ROCE trend at Fertilizantes Heringer, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.3% from 51% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Fertilizantes Heringer has decreased its current liabilities to 43% of total assets. So we could link some of this to the decrease in ROCE. 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line On Fertilizantes Heringer's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Fertilizantes Heringer is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 61% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we found 3 warning signs for Fertilizantes Heringer (2 can't be ignored) you should be aware of.

While Fertilizantes Heringer 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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