Has Vivara Participações (BVMF:VIVA3) Got What It Takes To Become A Multi-Bagger?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Vivara Participações (BVMF:VIVA3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Vivara Participações, this is the formula:

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

0.17 = R$247m ÷ (R$1.9b - R$477m) (Based on the trailing twelve months to September 2020).

Therefore, Vivara Participações has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 5.4% it's much better.

View our latest analysis for Vivara Participações

Above you can see how the current ROCE for Vivara Participações 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 Vivara Participações.

How Are Returns Trending?

When we looked at the ROCE trend at Vivara Participações, we didn't gain much confidence. Around three years ago the returns on capital were 41%, but since then they've fallen to 17%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Vivara Participações has done well to pay down its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, we're somewhat concerned by Vivara Participações' diminishing returns on increasing amounts of capital. However the stock has delivered a 73% return to shareholders over the last year, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to continue researching Vivara Participações, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Vivara Participações 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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