Is Positivo Tecnologia (BVMF:POSI3) A Future Multi-bagger?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Positivo Tecnologia's (BVMF:POSI3) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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 Positivo Tecnologia:

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

0.054 = R$67m ÷ (R$2.6b - R$1.3b) (Based on the trailing twelve months to September 2020).

So, Positivo Tecnologia has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 8.9%.

View our latest analysis for Positivo Tecnologia

Above you can see how the current ROCE for Positivo Tecnologia 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 Positivo Tecnologia here for free.

How Are Returns Trending?

The fact that Positivo Tecnologia is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 5.4% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Positivo Tecnologia is utilizing 39% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

Another thing to note, Positivo Tecnologia has a high ratio of current liabilities to total assets of 51%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

Long story short, we're delighted to see that Positivo Tecnologia's reinvestment activities have paid off and the company is now profitable. And a remarkable 239% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, Positivo Tecnologia does come with some risks, and we've found 2 warning signs that you should be aware of.

While Positivo Tecnologia 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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