Stock Analysis

Capital Allocation Trends At Brisanet Participações (BVMF:BRIT3) Aren't Ideal

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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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Brisanet Participações (BVMF:BRIT3), we don't think it's current trends fit the mold of a multi-bagger.

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 Brisanet Participações:

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

0.093 = R$262m ÷ (R$3.2b - R$373m) (Based on the trailing twelve months to December 2023).

So, Brisanet Participações has an ROCE of 9.3%. In absolute terms, that's a low return but it's around the Telecom industry average of 8.3%.

Check out our latest analysis for Brisanet Participações

BOVESPA:BRIT3 Return on Capital Employed April 16th 2024

Above you can see how the current ROCE for Brisanet 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 Brisanet Participações for free.

The Trend Of ROCE

In terms of Brisanet Participações' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.3% from 38% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Brisanet Participações has done well to pay down its current liabilities to 12% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Brisanet Participações' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Brisanet Participações is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 75% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

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

While Brisanet Participações may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Valuation is complex, but we're helping make it simple.

Find out whether Brisanet Participações is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.