Stock Analysis

Sendas Distribuidora (BVMF:ASAI3) Is Looking To Continue Growing Its Returns On Capital

BOVESPA:ASAI3
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What trends should we look for it we want to identify stocks that can 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Sendas Distribuidora's (BVMF:ASAI3) returns on capital, so let's have a look.

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. The formula for this calculation on Sendas Distribuidora is:

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

0.14 = R$3.4b ÷ (R$42b - R$17b) (Based on the trailing twelve months to March 2024).

Thus, Sendas Distribuidora has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 11% generated by the Consumer Retailing industry.

See our latest analysis for Sendas Distribuidora

roce
BOVESPA:ASAI3 Return on Capital Employed May 21st 2024

Above you can see how the current ROCE for Sendas Distribuidora 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 analyst report for Sendas Distribuidora .

How Are Returns Trending?

The trends we've noticed at Sendas Distribuidora are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 60% more capital is being employed now too. So we're very much inspired by what we're seeing at Sendas Distribuidora thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Sendas Distribuidora has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Sendas Distribuidora's ROCE

All in all, it's terrific to see that Sendas Distribuidora is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 23% in the last three years. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing: We've identified 2 warning signs with Sendas Distribuidora (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

While Sendas Distribuidora isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Valuation is complex, but we're helping make it simple.

Find out whether Sendas Distribuidora is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.