Neogrid Participações' (BVMF:NGRD3) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Neogrid Participações (BVMF:NGRD3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. The formula for this calculation on Neogrid Participações is:

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

0.036 = R$22m ÷ (R$740m - R$123m) (Based on the trailing twelve months to March 2022).

Therefore, Neogrid Participações has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Software industry average of 10%.

View our latest analysis for Neogrid Participações

Above you can see how the current ROCE for Neogrid Participações compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Neogrid Participações here for free.

What Does the ROCE Trend For Neogrid Participações Tell Us?

When we looked at the ROCE trend at Neogrid Participações, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 3.6%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Neogrid Participações' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Neogrid Participações is reinvesting for growth and has higher sales as a result. But since the stock has dived 70% in the last year, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.

On a final note, we've found 4 warning signs for Neogrid Participações that we think you should be aware of.

While Neogrid Participações 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.