Restoque Comércio e Confecções de Roupas (BVMF:LLIS3) Knows How To Allocate Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Restoque Comércio e Confecções de Roupas (BVMF:LLIS3) we really liked what we saw.

Understanding 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 Restoque Comércio e Confecções de Roupas:

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

0.23 = R$414m ÷ (R$2.1b - R$291m) (Based on the trailing twelve months to March 2021).

Therefore, Restoque Comércio e Confecções de Roupas has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Luxury industry average of 8.5%.

View our latest analysis for Restoque Comércio e Confecções de Roupas

In the above chart we have measured Restoque Comércio e Confecções de Roupas' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Restoque Comércio e Confecções de Roupas.

The Trend Of ROCE

We're pretty happy with how the ROCE has been trending at Restoque Comércio e Confecções de Roupas. We found that the returns on capital employed over the last five years have risen by 398%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 22% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 14%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

In Conclusion...

In the end, Restoque Comércio e Confecções de Roupas has proven it's capital allocation skills are good with those higher returns from less amount of capital. Although the company may be facing some issues elsewhere since the stock has plunged 85% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

If you want to know some of the risks facing Restoque Comércio e Confecções de Roupas we've found 4 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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