Returns On Capital Are Showing Encouraging Signs At Reditus Sociedade Gestora de Participações Sociais (ELI:RED)

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Reditus Sociedade Gestora de Participações Sociais (ELI:RED) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Reditus Sociedade Gestora de Participações Sociais is:

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

0.018 = €1.2m ÷ (€161m - €97m) (Based on the trailing twelve months to June 2021).

Thus, Reditus Sociedade Gestora de Participações Sociais has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the IT industry average of 14%.

View our latest analysis for Reditus Sociedade Gestora de Participações Sociais

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 Reditus Sociedade Gestora de Participações Sociais' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Reditus Sociedade Gestora de Participações Sociais' ROCE Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased by 88% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Reditus Sociedade Gestora de Participações Sociais appears to been achieving more with less, since the business is using 52% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 60% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Key Takeaway

From what we've seen above, Reditus Sociedade Gestora de Participações Sociais has managed to increase it's returns on capital all the while reducing it's capital base. However the stock is down a substantial 87% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

One more thing to note, we've identified 2 warning signs with Reditus Sociedade Gestora de Participações Sociais and understanding these should be part of your investment process.

While Reditus Sociedade Gestora de Participações Sociais isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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