Stock Analysis

Shareholders Would Enjoy A Repeat Of Farmacias Benavides. de's (BMV:BEVIDESB) Recent Growth In Returns

July 01, 2023

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Farmacias Benavides. de (BMV:BEVIDESB) looks great, so lets see what the trend can tell us.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Farmacias Benavides. de is:

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

0.23 = Mex$723m ÷ (Mex$7.7b - Mex$4.5b) (Based on the trailing twelve months to March 2023).

Therefore, Farmacias Benavides. de has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 19% earned by companies in a similar industry.

Check out our latest analysis for Farmacias Benavides. de

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Farmacias Benavides. de's past further, check out this free graph of past earnings, revenue and cash flow.

SWOT Analysis for Farmacias Benavides. de

Strength

Earnings growth over the past year exceeded the industry.

Debt is well covered by cash flow.

Balance sheet summary for BEVIDES B.

Weakness

Interest payments on debt are not well covered.

Key risks with investing in BEVIDES B.

Opportunity

Trading below our estimate of fair value by more than 20%.

Lack of analyst coverage makes it difficult to determine BEVIDES B's earnings prospects.

Threat

No apparent threats visible for BEVIDES B.

The Trend Of ROCE

The fact that Farmacias Benavides. de is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 23% on its capital. And unsurprisingly, like most companies trying to break into the black, Farmacias Benavides. de is utilizing 37% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a side note, Farmacias Benavides. de's current liabilities are still rather high at 59% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Farmacias Benavides. de's ROCE

In summary, it's great to see that Farmacias Benavides. de has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 41% in the last three years. So researching this company further and determining whether or not these trends will continue seems justified.

Farmacias Benavides. de does have some risks though, and we've spotted 2 warning signs for Farmacias Benavides. de that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

Valuation is complex, but we're helping make it simple.

Find out whether Farmacias Benavides. de is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.