T4F Entretenimento (BVMF:SHOW3) Shareholders Will Want The ROCE Trajectory To Continue

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at T4F Entretenimento (BVMF:SHOW3) and its trend of ROCE, we really liked what we saw.

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 T4F Entretenimento is:

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

0.15 = R$38m ÷ (R$449m - R$206m) (Based on the trailing twelve months to June 2024).

Therefore, T4F Entretenimento has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Entertainment industry average of 9.9% it's much better.

Check out our latest analysis for T4F Entretenimento

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of T4F Entretenimento.

What Can We Tell From T4F Entretenimento's ROCE Trend?

We're pretty happy with how the ROCE has been trending at T4F Entretenimento. We found that the returns on capital employed over the last five years have risen by 2,826%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 47% less than it was five years ago, which can be indicative of a business that's improving its efficiency. T4F Entretenimento may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 46% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On T4F Entretenimento's ROCE

From what we've seen above, T4F Entretenimento has managed to increase it's returns on capital all the while reducing it's capital base. However the stock is down a substantial 73% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

One more thing, we've spotted 2 warning signs facing T4F Entretenimento that you might find interesting.

While T4F Entretenimento isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.