Grupo SBF (BVMF: SBFG3) could have difficulty using its capital efficiently

Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we take a look at a few key financial metrics. A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in connection with growth amount capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. In light of this, when we looked at SBF Group (BVMF: SBFG3) and its ROCE trend, we weren’t exactly thrilled.

Return on capital employed (ROCE): what is it?

For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. To calculate this metric for Grupo SBF, here is the formula:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.019 = 88 million reais ÷ (6.6 billion reais – 2.0 billion reais) (Based on the last twelve months up to June 2021).

So, Grupo SBF has a ROCE of 1.9%. In absolute terms, this is a low return and it is also below the specialty retail industry average of 14%.

See our latest analysis for Grupo SBF

Above you can see how Grupo SBF’s current ROCE compares to its previous returns on equity, but there is little you can say about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Grupo SBF.

What the ROCE trend can tell us

When we looked at the ROCE trend at Grupo SBF, we didn’t gain much confidence. About five years ago, returns on capital were 11%, but since then they have fallen to 1.9%. Although, as income and the amount of assets used in the business have increased, this could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. And if the capital increase generates additional returns, the company, and therefore the shareholders, will benefit in the long run.

By the way, Grupo SBF has done well to reduce its current liabilities to 31% of total assets. This could partly explain the drop in ROCE. In addition, it can reduce some aspects of the risk to the business, as the company’s suppliers or short-term creditors are now less funding its operations. Some argue that this reduces the company’s efficiency in generating ROCE since it now finances more of the operations with its own money.

In conclusion…

In summary, despite lower returns in the short term, we are encouraged to see Grupo SBF reinvesting for growth and thus achieving higher sales. In addition, the stock has climbed 14% over the past year, it looks like investors are optimistic about the future. So if these growth trends continue, we would be optimistic about the future of the title.

Since virtually every business faces risks, it’s worth knowing about them, and we’ve spotted 2 warning signs for Grupo SBF (1 of which makes us a little uncomfortable!) that you should know.

If you want to look for solid businesses with great income, check out this free list of companies with good balance sheets and impressive returns on equity.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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