Capital Allocation Trends At Hidrovias do Brasil (BVMF:HBSA3) Aren't Ideal

What trends should we look for it we want to identify stocks that can 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. However, after investigating Hidrovias do Brasil (BVMF:HBSA3), we don't think it's current trends fit the mold of a multi-bagger.

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. 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)

0.042 = R$256m ÷ (R$6.7b - R$618m) (Based on the trailing twelve months to September 2022).

Therefore, Hidrovias do Brasil has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Shipping industry average of 12%.

Our analysis indicates that HBSA3 is potentially overvalued!

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Hidrovias do Brasil Tell Us?

On the surface, the trend of ROCE at Hidrovias do Brasil doesn't inspire confidence. Around five years ago the returns on capital were 5.3%, but since then they've fallen to 4.2%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

While returns have fallen for Hidrovias do Brasil in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 12% 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.

While Hidrovias do Brasil doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While Hidrovias do Brasil 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.