The Returns On Capital At Guararapes Confecções (BVMF:GUAR3) Don't Inspire Confidence

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Guararapes Confecções (BVMF:GUAR3), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for Guararapes Confecções:

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

0.093 = R$731m ÷ (R$13b - R$5.2b) (Based on the trailing twelve months to September 2024).

Therefore, Guararapes Confecções has an ROCE of 9.3%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 12%.

Check out our latest analysis for Guararapes Confecções

In the above chart we have measured Guararapes Confecções' 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 Guararapes Confecções for free.

So How Is Guararapes Confecções' ROCE Trending?

We are a bit worried about the trend of returns on capital at Guararapes Confecções. Unfortunately the returns on capital have diminished from the 16% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Guararapes Confecções to turn into a multi-bagger.

What We Can Learn From Guararapes Confecções' ROCE

In summary, it's unfortunate that Guararapes Confecções is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 76% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing to note, we've identified 1 warning sign with Guararapes Confecções and understanding this should be part of your investment process.

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.