Is There More Growth In Store For GPC Participações' (BVMF:GPCP3) Returns On Capital?

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in GPC Participações' (BVMF:GPCP3) returns on capital, so let's have a look.

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 GPC Participações:

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

0.14 = R$86m ÷ (R$848m - R$217m) (Based on the trailing twelve months to September 2020).

Therefore, GPC Participações has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.2% generated by the Chemicals industry.

See our latest analysis for GPC Participações

Historical performance is a great place to start when researching a stock so above you can see the gauge for GPC Participações' ROCE against it's prior returns. If you'd like to look at how GPC Participações 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 GPC Participações Tell Us?

GPC Participações is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 14%. The amount of capital employed has increased too, by 100%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

One more thing to note, GPC Participações has decreased current liabilities to 26% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that GPC Participações has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

To sum it up, GPC Participações has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 1,136% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if GPC Participações can keep these trends up, it could have a bright future ahead.

GPC Participações does have some risks though, and we've spotted 2 warning signs for GPC Participações that you might be interested in.

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. 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.
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