Investors Could Be Concerned With Armac Locação Logística e Serviços' (BVMF:ARML3) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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.

What Is 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)

0.06 = R$173m ÷ (R$3.2b - R$343m) (Based on the trailing twelve months to March 2022).

Therefore, Armac Locação Logística e Serviços has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 16%.

View our latest analysis for Armac Locação Logística e Serviços

Above you can see how the current ROCE for Armac Locação Logística e Serviços 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.

How Are Returns Trending?

In terms of Armac Locação Logística e Serviços' historical ROCE movements, the trend isn't fantastic. Over the last three years, returns on capital have decreased to 6.0% from 26% three 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.

On a related note, Armac Locação Logística e Serviços has decreased its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. 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. 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

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. These growth trends haven't led to growth returns though, since the stock has fallen 36% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Armac Locação Logística e Serviços does have some risks though, and we've spotted 1 warning sign for Armac Locação Logística e Serviços that you might be interested in.

While Armac Locação Logística e Serviços isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.