Armac Locação Logística e Serviços (BVMF:ARML3) Is Reinvesting At Lower Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. 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 Armac Locação Logística e Serviços (BVMF:ARML3), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Armac Locação Logística e Serviços is:

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

0.12 = R$425m ÷ (R$4.0b - R$554m) (Based on the trailing twelve months to September 2023).

Thus, Armac Locação Logística e Serviços has an ROCE of 12%. In absolute terms, that's a pretty standard return but compared to the Trade Distributors industry average it falls behind.

View 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'd like, you can check out the forecasts from the analysts covering Armac Locação Logística e Serviços here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Armac Locação Logística e Serviços, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 12% from 28% four 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.

On a side note, Armac Locação Logística e Serviços has done well to pay down its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From 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. And the stock has followed suit returning a meaningful 61% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we found 3 warning signs for Armac Locação Logística e Serviços (1 doesn't sit too well with us) you should be aware of.

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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.