Will Grupo SBF (BVMF:CNTO3) Multiply In Value Going Forward?

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Grupo SBF (BVMF:CNTO3), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Grupo SBF is:

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

0.084 = R$332m ÷ (R$4.7b - R$771m) (Based on the trailing twelve months to June 2020).

Thus, Grupo SBF has an ROCE of 8.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.8%.

See our latest analysis for Grupo SBF

In the above chart we have measured Grupo SBF's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Grupo SBF here for free.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Grupo SBF. The company has consistently earned 8.4% for the last five years, and the capital employed within the business has risen 971% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Grupo SBF has done well to reduce current liabilities to 16% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Grupo SBF's ROCE

In conclusion, Grupo SBF has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 49% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching Grupo SBF, you might be interested to know about the 3 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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