The Returns On Capital At Armac Locação Logística e Serviços (BVMF:ARML3) Don't Inspire Confidence

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Armac Locação Logística e Serviços (BVMF:ARML3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. 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$521m ÷ (R$4.9b - R$925m) (Based on the trailing twelve months to June 2024).

Therefore, Armac Locação Logística e Serviços has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Trade Distributors industry average of 16%.

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

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

On the surface, the trend of ROCE at Armac Locação Logística e Serviços doesn't inspire confidence. Around five years ago the returns on capital were 27%, but since then they've fallen to 13%. 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.

The Bottom Line On Armac Locação Logística e Serviços' ROCE

While returns have fallen for Armac Locação Logística e Serviços in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 58% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 2 warning signs we've spotted with Armac Locação Logística e Serviços (including 1 which can't be ignored) .

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.