There Are Reasons To Feel Uneasy About Guararapes Confecções' (BVMF:GUAR3) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. However, after briefly looking over the numbers, we don't think Guararapes Confecções (BVMF:GUAR3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Guararapes Confecções is:

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

0.052 = R$452m ÷ (R$14b - R$5.5b) (Based on the trailing twelve months to June 2023).

Therefore, Guararapes Confecções has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Luxury industry average of 16%.

Check out 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 to see what analysts are forecasting going forward, you should check out our free report for Guararapes Confecções.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Guararapes Confecções doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last five years. However it looks like Guararapes Confecções might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Guararapes Confecções' ROCE

Bringing it all together, while we're somewhat encouraged by Guararapes Confecções' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 59% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we found 2 warning signs for Guararapes Confecções (1 shouldn't be ignored) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.