Returns On Capital Are Showing Encouraging Signs At Padtec Holding (BVMF:PDTC3)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. With that in mind, we've noticed some promising trends at Padtec Holding (BVMF:PDTC3) so let's look a bit deeper.

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What Is 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. Analysts use this formula to calculate it for Padtec Holding:

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

0.015 = R$7.6m ÷ (R$689m - R$194m) (Based on the trailing twelve months to March 2025).

Thus, Padtec Holding has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Communications industry average of 7.0%.

See our latest analysis for Padtec Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Padtec Holding's ROCE against it's prior returns. If you'd like to look at how Padtec Holding has performed in the past in other metrics, you can view this free graph of Padtec Holding's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Padtec Holding has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 1.5% on its capital. And unsurprisingly, like most companies trying to break into the black, Padtec Holding is utilizing 741% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 28% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From Padtec Holding's ROCE

Long story short, we're delighted to see that Padtec Holding's reinvestment activities have paid off and the company is now profitable. However the stock is down a substantial 82% 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.

Padtec Holding does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those don't sit too well with us...

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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.