Our Take On The Returns On Capital At Companhia de Locação das Américas (BVMF:LCAM3)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Companhia de Locação das Américas (BVMF:LCAM3), it didn't seem to tick all of these boxes.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Companhia de Locação das Américas:

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

0.088 = R$778m ÷ (R$11b - R$1.9b) (Based on the trailing twelve months to March 2020).

Thus, Companhia de Locação das Américas has an ROCE of 8.8%. Even though it's in line with the industry average of 8.8%, it's still a low return by itself.

View our latest analysis for Companhia de Locação das Américas

Above you can see how the current ROCE for Companhia de Locação das Américas compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Companhia de Locação das Américas here for free.

What Does the ROCE Trend For Companhia de Locação das Américas Tell Us?

The returns on capital haven't changed much for Companhia de Locação das Américas in recent years. The company has employed 652% more capital in the last five years, and the returns on that capital have remained stable at 8.8%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

In summary, Companhia de Locação das Américas has simply been reinvesting capital and generating the same low rate of return as before. Investors must think there's better things to come because the stock has knocked it out of the park delivering a 2,055% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know more about Companhia de Locação das Américas, we've spotted 5 warning signs, and 2 of them are significant.

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

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