Investors Met With Slowing Returns on Capital At Allpark Empreendimentos Participações e Serviços (BVMF:ALPK3)

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Allpark Empreendimentos Participações e Serviços (BVMF:ALPK3) 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)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Allpark Empreendimentos Participações e Serviços is:

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

0.056 = R$102m ÷ (R$2.6b - R$735m) (Based on the trailing twelve months to June 2022).

Therefore, Allpark Empreendimentos Participações e Serviços has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 13%.

Check out our latest analysis for Allpark Empreendimentos Participações e Serviços

In the above chart we have measured Allpark Empreendimentos Participações 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 Allpark Empreendimentos Participações e Serviços here for free.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Allpark Empreendimentos Participações e Serviços in recent years. Over the past five years, ROCE has remained relatively flat at around 5.6% and the business has deployed 58% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

Long story short, while Allpark Empreendimentos Participações e Serviços has been reinvesting its capital, the returns that it's generating haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 61% in the last year. Therefore based on the analysis done in this article, we don't think Allpark Empreendimentos Participações e Serviços has the makings of a multi-bagger.

One more thing: We've identified 4 warning signs with Allpark Empreendimentos Participações e Serviços (at least 2 which don't sit too well with us) , and understanding these would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.