There are a few key trends to look out for if we want to identify the next multi-bagger. A common approach is to try to find a company with Return on capital employed (ROCE) which is increasing, in line with growth amount capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. So on that note, Positivo Tecnologia (BVMF:POSI3) looks quite promising when it comes to its capital return trends.
Understanding return on capital employed (ROCE)
For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. Analysts use this formula to calculate it for Positivo Tecnologia:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.16 = R$299 million ÷ (R$3.8 billion – R$1.9 billion) (Based on the last twelve months to December 2021).
So, Positivo Tecnologia has a ROCE of 16%. In absolute terms, that’s a decent return, but compared to the tech industry average of 9.4%, it’s much better.
Check out our latest analysis for Positivo Tecnologia
In the chart above, we measured Positivo Tecnologia’s past ROCE against its past performance, but the future is arguably more important. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
The ROCE trend
The trends we’ve noticed at Positivo Tecnologia are quite reassuring. Over the past five years, return on capital employed has increased substantially to 16%. The amount of capital employed also increased by 142%. This may indicate that there are many opportunities to invest capital internally and at ever higher rates, a common combination among multi-baggers.
Furthermore, Positivo Tecnologia’s current liabilities are still quite high at 52% of total assets. This may entail certain risks, since the company is essentially dependent on its suppliers or other types of short-term creditors. Although this is not necessarily a bad thing, it can be beneficial if this ratio is lower.
The essentials on the ROCE of Positivo Tecnologia
Overall, it is great to see that Positivo Tecnologia is reaping the rewards of past investments and increasing its capital base. And a remarkable total return of 186% over the past five years tells us that investors expect more good things to come. So given that the stock has proven to have some promising trends, it’s worth researching the company further to see if those trends are likely to persist.
One more thing: we have identified 4 warning signs with Positivo Tecnologia (at least 2 of which are of concern), and understanding them would certainly be helpful.
For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high 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 only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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