The Return Trends At Veste Estilo (BVMF:VSTE3) Look Promising

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. With that in mind, we've noticed some promising trends at Veste Estilo (BVMF:VSTE3) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Veste Estilo, this is the formula:

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

0.18 = R$241m ÷ (R$1.7b - R$367m) (Based on the trailing twelve months to September 2023).

So, Veste Estilo has an ROCE of 18%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Luxury industry average of 16%.

See our latest analysis for Veste Estilo

Above you can see how the current ROCE for Veste Estilo compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Veste Estilo Tell Us?

We're pretty happy with how the ROCE has been trending at Veste Estilo. We found that the returns on capital employed over the last five years have risen by 220%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Veste Estilo appears to been achieving more with less, since the business is using 55% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Key Takeaway

In the end, Veste Estilo has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has dived 94% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

If you want to know some of the risks facing Veste Estilo we've found 3 warning signs (2 are concerning!) that you should be aware of before investing here.

While Veste Estilo 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.