Should You Be Impressed By Vulcabras Azaleia's (BVMF:VULC3) Returns on Capital?

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Vulcabras Azaleia (BVMF:VULC3), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Vulcabras Azaleia, this is the formula:

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

0.099 = R$120m ÷ (R$1.4b - R$173m) (Based on the trailing twelve months to March 2020).

Thus, Vulcabras Azaleia has an ROCE of 9.9%. Even though it's in line with the industry average of 9.7%, it's still a low return by itself.

Check out our latest analysis for Vulcabras Azaleia

In the above chart we have a measured Vulcabras Azaleia's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Vulcabras Azaleia.

How Are Returns Trending?

In terms of Vulcabras Azaleia's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.9% from 14% five years ago. However it looks like Vulcabras Azaleia might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Vulcabras Azaleia has decreased its current liabilities to 12% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

To conclude, we've found that Vulcabras Azaleia is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park delivering a 215% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 1 warning sign for Vulcabras Azaleia that we think you should be aware of.

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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