Allpark Empreendimentos Participações e Serviços (BVMF:ALPK3) May Have Issues Allocating Its Capital

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. In light of that, when we looked at Allpark Empreendimentos Participações e Serviços (BVMF:ALPK3) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Allpark Empreendimentos Participações e Serviços, this is the formula:

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

0.016 = R$31m ÷ (R$2.6b - R$691m) (Based on the trailing twelve months to December 2021).

So, Allpark Empreendimentos Participações e Serviços has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 10%.

View our latest analysis for Allpark Empreendimentos Participações e Serviços

Above you can see how the current ROCE for Allpark Empreendimentos Participações 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.

So How Is Allpark Empreendimentos Participações e Serviços' ROCE Trending?

On the surface, the trend of ROCE at Allpark Empreendimentos Participações e Serviços doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.6% from 2.3% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Allpark Empreendimentos Participações e Serviços has done well to pay down its current liabilities to 27% 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.

The Bottom Line On Allpark Empreendimentos Participações e Serviços' ROCE

While returns have fallen for Allpark Empreendimentos Participações 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 52% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know more about Allpark Empreendimentos Participações e Serviços, we've spotted 3 warning signs, and 1 of them is concerning.

While Allpark Empreendimentos Participações 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.