We're Watching These Trends At Localiza Rent a Car (BVMF:RENT3)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Having said that, from a first glance at Localiza Rent a Car (BVMF:RENT3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Localiza Rent a Car, this is the formula:

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

0.084 = R$1.4b ÷ (R$19b - R$2.1b) (Based on the trailing twelve months to June 2020).

So, Localiza Rent a Car has an ROCE of 8.4%. In absolute terms, that's a low return, but it's much better than the Transportation industry average of 6.7%.

View our latest analysis for Localiza Rent a Car

Above you can see how the current ROCE for Localiza Rent a Car compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Localiza Rent a Car's ROCE Trend?

In terms of Localiza Rent a Car's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.4% from 16% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Localiza Rent a Car's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Localiza Rent a Car. And the stock has done incredibly well with a 723% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Localiza Rent a Car (of which 2 are significant!) that you should know about.

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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