Trisul's (BVMF:TRIS3) capital allocation trends are not ideal

If we want to identify the next multi-bagger, we need to pay attention to a few key trends. Typically we want to notice a growth trend to return on capital employed (ROCE) and, as a result, a growing one base of the capital employed. This shows us that it is a compounding machine, capable of continually reinvesting its profits back into the company and generating higher returns. However, after a quick look at the numbers, we don't think so Trisul (BVMF:TRIS3) has the makings of a multi-bagger for the future, but let's take a look at why that might be.

What is Return on Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's annual pre-tax profit (its return) in relation to the capital employed in the company. The formula for this calculation on Trisul is:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.057 = R$113 million ÷ (R$2.8 billion – R$766 million) (Based on the last twelve months ended December 2023).

Therefore, Trisul has a ROCE of 5.7%. Although it is in line with the industry average of 5.8%, the return itself is still low.

Check out our latest analysis for Trisul

In the chart above, we measured Trisul's past ROCE compared to its previous performance, but the future is arguably more important. If you are interested, you can see the analyst forecasts in our free Analyst report for Trisul.

The trend of ROCE

When we looked at the ROCE trend at Trisul, we were not very confident. While the return on capital was 12% around five years ago, it has since fallen to 5.7%. Although both sales and the amount of assets used in the company have increased, this could indicate that the company is investing in growth and the additional capital has led to a short-term decrease in ROCE. And if the increased capital generates additional income, the company and thus the shareholders benefit in the long term.

Our opinion on Trisul's ROCE

Although returns on capital have declined in the short term, we think it is encouraging that both revenue and capital employed have increased for Trisul. Against this backdrop, the stock has only gained 23% over the last five years. We therefore recommend taking a closer look at this stock to see if it has what it takes to be a good investment.

If you would like to explore Trisul further, you may be interested in learning more about it 1 warning sign That's what our analysis found.

Although Trisul doesn't have the highest return, check it out here free List of companies that generate high returns on equity with solid balance sheets.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.