Here's What's Concerning About Movida Participações' (BVMF:MOVI3) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Movida Participações (BVMF:MOVI3) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Movida Participações:

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

0.065 = R$725m ÷ (R$13b - R$1.8b) (Based on the trailing twelve months to March 2021).

Thus, Movida Participações has an ROCE of 6.5%. On its own, that's a low figure but it's around the 8.0% average generated by the Transportation industry.

See our latest analysis for Movida Participações

In the above chart we have measured Movida Participações' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Movida Participações.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Movida Participações, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 6.5%. However it looks like Movida Participações might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Movida Participações has decreased its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

To conclude, we've found that Movida Participações is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 282% gain to shareholders who have held over the last three years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing: We've identified 3 warning signs with Movida Participações (at least 2 which are concerning) , and understanding these would certainly be useful.

While Movida Participações 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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