Stock Futures – Here’s What To Make Of Guararapes Confecções’ (BVMF:GUAR3) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Guararapes Confecções (BVMF:GUAR3), we don’t think it’s current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Guararapes Confecções is:

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

0.011 = R$86m ÷ (R$13b – R$5.4b) (Based on the trailing twelve months to September 2020).

Therefore, Guararapes Confecções has an ROCE of 1.1%. Ultimately, that’s a low return and it under-performs the Luxury industry average of 5.3%.

View our latest analysis for Guararapes Confecções

In the above chart we have measured Guararapes Confecções’ prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

In terms of Guararapes Confecções’ historical ROCE movements, the trend isn’t fantastic. Over the last five years, returns on capital have decreased to 1.1% from 13% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it’s actually producing a lower return – “less bang for their buck” per se.

On a separate but related note, it’s important to know that Guararapes Confecções has a current liabilities to total assets ratio of 41%, which we’d consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Guararapes Confecções’ ROCE

In summary, we’re somewhat concerned by Guararapes Confecções’ diminishing returns on increasing amounts of capital. The market must be rosy on the stock’s future because even though the underlying trends aren’t too encouraging, the stock has soared 215%. In any case, the current underlying trends don’t bode well for long term performance so unless they reverse, we’d start looking elsewhere.

If you want to know some of the risks facing Guararapes Confecções we’ve found 4 warning signs (2 are potentially serious!) that you should be aware of before investing here.

While Guararapes Confecções may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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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