We Like These Underlying Return On Capital Trends At Irani Papel e Embalagem (BVMF:RANI3)

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Speaking of which, we noticed some great changes in Irani Papel e Embalagem's (BVMF:RANI3) returns on capital, so let's have a look.

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. To calculate this metric for Irani Papel e Embalagem, this is the formula:

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

0.16 = R$535m ÷ (R$3.8b - R$521m) (Based on the trailing twelve months to June 2023).

Therefore, Irani Papel e Embalagem has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Forestry industry average of 12% it's much better.

Check out our latest analysis for Irani Papel e Embalagem

Above you can see how the current ROCE for Irani Papel e Embalagem compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

Investors would be pleased with what's happening at Irani Papel e Embalagem. Over the last five years, returns on capital employed have risen substantially to 16%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 181%. So we're very much inspired by what we're seeing at Irani Papel e Embalagem thanks to its ability to profitably reinvest capital.

The Bottom Line On Irani Papel e Embalagem's ROCE

All in all, it's terrific to see that Irani Papel e Embalagem is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 623% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One final note, you should learn about the 4 warning signs we've spotted with Irani Papel e Embalagem (including 3 which shouldn't be ignored) .

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. 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.