If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. So on that note, Cyrela Brazil Realty Empreendimentos e Participações (BVMF:CYRE3) 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. To calculate this metric for Cyrela Brazil Realty Empreendimentos e Participações, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.053 = R$667m ÷ (R$16b – R$3.1b) (Based on the trailing twelve months to September 2022).
So, Cyrela Brazil Realty Empreendimentos e Participações has an ROCE of 5.3%. Even though it’s in line with the industry average of 5.3%, it’s still a low return by itself.
View our latest analysis for Cyrela Brazil Realty Empreendimentos e Participações
Above you can see how the current ROCE for Cyrela Brazil Realty Empreendimentos e 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.
What The Trend Of ROCE Can Tell Us
The fact that Cyrela Brazil Realty Empreendimentos e Participações is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it’s now earning 5.3% on its capital. Not only that, but the company is utilizing 46% more capital than before, but that’s to be expected from a company trying to break into profitability. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
The Bottom Line
In summary, it’s great to see that Cyrela Brazil Realty Empreendimentos e Participações has managed to break into profitability and is continuing to reinvest in its business. Since the stock has only returned 28% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
Like most companies, Cyrela Brazil Realty Empreendimentos e Participações does come with some risks, and we’ve found 1 warning sign that you should be aware of.
While Cyrela Brazil Realty Empreendimentos e 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.
Valuation is complex, but we’re helping make it simple.
Find out whether Cyrela Brazil Realty Empreendimentos e Participações 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.