T4F Entretenimento (BVMF:SHOW3) Hasn't Managed To Accelerate Its Returns

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Looking at T4F Entretenimento (BVMF:SHOW3), it does have a high ROCE right now, but lets see how returns are trending.

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. To calculate this metric for T4F Entretenimento, this is the formula:

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

0.21 = R$53m ÷ (R$639m - R$386m) (Based on the trailing twelve months to March 2023).

Therefore, T4F Entretenimento has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 7.2%.

Check out our latest analysis for T4F Entretenimento

Historical performance is a great place to start when researching a stock so above you can see the gauge for T4F Entretenimento's ROCE against it's prior returns. If you're interested in investigating T4F Entretenimento's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 29% in that same period. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. But we have to give it to T4F Entretenimento because the returns on the capital it is employing are still high in relative terms.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 60% of total assets, this reported ROCE would probably be less than21% because total capital employed would be higher.The 21% ROCE could be even lower if current liabilities weren't 60% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

The Bottom Line

It's a shame to see that T4F Entretenimento is effectively shrinking in terms of its capital base. Since the stock has declined 67% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

T4F Entretenimento does have some risks, we noticed 3 warning signs (and 2 which are potentially serious) we think you should know about.

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.