Armac Locação Logística e Serviços (BVMF:ARML3) May Have Issues Allocating Its Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Armac Locação Logística e Serviços (BVMF:ARML3) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Armac Locação Logística e Serviços, this is the formula:

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

0.12 = R$388m ÷ (R$3.8b - R$403m) (Based on the trailing twelve months to June 2023).

So, 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.

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'd like to see what analysts are forecasting going forward, you should check out our free report for Armac Locação Logística e Serviços.

What Does the ROCE Trend For Armac Locação Logística e Serviços Tell Us?

On the surface, the trend of ROCE at Armac Locação Logística e Serviços doesn't inspire confidence. To be more specific, ROCE has fallen from 27% over the last four years. 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 11% 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.

Our Take On Armac Locação Logística e Serviços' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Armac Locação Logística e Serviços is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 20% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Armac Locação Logística e Serviços does have some risks, we noticed 3 warning signs (and 2 which can't be ignored) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.