The Returns At Guararapes Confecções (BVMF:GUAR3) Aren't Growing

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at Guararapes Confecções (BVMF:GUAR3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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What Is 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 Guararapes Confecções is:

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

0.099 = R$760m ÷ (R$14b - R$5.9b) (Based on the trailing twelve months to December 2024).

Thus, Guararapes Confecções has an ROCE of 9.9%. On its own, that's a low figure but it's around the 12% average generated by the Luxury industry.

View our latest analysis for Guararapes Confecções

Above you can see how the current ROCE for Guararapes Confecções compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Guararapes Confecções for free.

What Can We Tell From Guararapes Confecções' ROCE Trend?

Things have been pretty stable at Guararapes Confecções, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Guararapes Confecções to be a multi-bagger going forward.

On a separate but related note, it's important to know that Guararapes Confecções has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Guararapes Confecções' ROCE

In a nutshell, Guararapes Confecções has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 27% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing Guararapes Confecções that you might find interesting.

While Guararapes Confecções 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.