Returns At Movida Participações (BVMF:MOVI3) Appear To Be Weighed Down

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. With that in mind, the ROCE of Movida Participações (BVMF:MOVI3) looks decent, right now, so lets see what the trend of returns can tell us.

What Is 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. To calculate this metric for Movida Participações, this is the formula:

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

0.11 = R$2.5b ÷ (R$26b - R$3.9b) (Based on the trailing twelve months to September 2022).

So, Movida Participações has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.

Check out the opportunities and risks within the BR Transportation industry.

Above you can see how the current ROCE for Movida Participações 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.

So How Is Movida Participações' ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has employed 945% more capital in the last five years, and the returns on that capital have remained stable at 11%. 11% is a pretty standard return, and it provides some comfort knowing that Movida Participações has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 15% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

In Conclusion...

In the end, Movida Participações has proven its ability to adequately reinvest capital at good rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Movida Participações (of which 2 don't sit too well with us!) that you should know about.

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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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.