Armac Locação Logística e Serviços (BVMF:ARML3) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Armac Locação Logística e Serviços (BVMF:ARML3), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. Analysts use this formula to calculate it for Armac Locação Logística e Serviços:

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

0.13 = R$548m ÷ (R$5.1b - R$1.0b) (Based on the trailing twelve months to September 2024).

So, Armac Locação Logística e Serviços has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 15% generated by the Trade Distributors industry.

Check out our latest analysis for Armac Locação Logística e Serviços

In the above chart we have measured Armac Locação Logística e Serviços' 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 analyst report for Armac Locação Logística e Serviços .

What Can We Tell From Armac Locação Logística e Serviços' ROCE Trend?

In terms of Armac Locação Logística e Serviços' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 13% from 28% 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. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Armac Locação Logística e Serviços' 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 Armac Locação Logística e Serviços. But since the stock has dived 77% in the last three years, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

Armac Locação Logística e Serviços does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.