If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Rumo (BVMF:RAIL3), 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. To calculate this metric for Rumo, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = R$2.9b ÷ (R$45b - R$5.0b) (Based on the trailing twelve months to March 2023).
Therefore, Rumo has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the Transportation industry average of 12%.
See our latest analysis for Rumo
In the above chart we have measured Rumo's 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 Rumo.
SWOT Analysis for Rumo
- Debt is well covered by earnings and cashflows.
- Dividend is low compared to the top 25% of dividend payers in the Transportation market.
- Expensive based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow faster than the Brazilian market.
- Revenue is forecast to grow slower than 20% per year.
The Trend Of ROCE
There are better returns on capital out there than what we're seeing at Rumo. Over the past five years, ROCE has remained relatively flat at around 7.2% and the business has deployed 67% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
Our Take On Rumo's ROCE
Long story short, while Rumo has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 63% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Like most companies, Rumo does come with some risks, and we've found 2 warning signs that you should be aware of.
While Rumo 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.
About BOVESPA:RAIL3
Reasonable growth potential with mediocre balance sheet.
