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Returns On Capital At Santos Brasil Participações (BVMF:STBP3) Paint A Concerning Picture
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 Santos Brasil Participações (BVMF:STBP3), 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 Santos Brasil Participações, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = R$109m ÷ (R$4.3b - R$455m) (Based on the trailing twelve months to March 2021).
Thus, Santos Brasil Participações has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 6.7%.
Check out our latest analysis for Santos Brasil Participações
In the above chart we have measured Santos Brasil Participações' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
When we looked at the ROCE trend at Santos Brasil Participações, we didn't gain much confidence. Around five years ago the returns on capital were 4.9%, but since then they've fallen to 2.8%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Santos Brasil Participações' ROCE
In summary, Santos Brasil Participações is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 273% gain to shareholders who have held over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Like most companies, Santos Brasil Participações does come with some risks, and we've found 3 warning signs that you should be aware of.
While Santos Brasil Participações 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. 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.
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About BOVESPA:STBP3
Santos Brasil Participações
Provides port container handling and logistics services in Brazil.
Solid track record with adequate balance sheet.