Be Wary Of Hidrovias do Brasil (BVMF:HBSA3) And Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Hidrovias do Brasil (BVMF:HBSA3) 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?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Hidrovias do Brasil, this is the formula:

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

0.057 = R$326m ÷ (R$6.4b - R$692m) (Based on the trailing twelve months to December 2022).

Therefore, Hidrovias do Brasil has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Shipping industry average of 11%.

Check out our latest analysis for Hidrovias do Brasil

Above you can see how the current ROCE for Hidrovias do Brasil compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hidrovias do Brasil.

So How Is Hidrovias do Brasil's ROCE Trending?

When we looked at the ROCE trend at Hidrovias do Brasil, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.2% over the last five years. 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.

What We Can Learn From Hidrovias do Brasil's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Hidrovias do Brasil. These growth trends haven't led to growth returns though, since the stock has fallen 27% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you're still interested in Hidrovias do Brasil it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Hidrovias do Brasil 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.

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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.