Here's What To Make Of Raia Drogasil's (BVMF:RADL3) Decelerating Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Raia Drogasil's (BVMF:RADL3) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Raia Drogasil is:

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

0.18 = R$1.9b ÷ (R$18b - R$7.6b) (Based on the trailing twelve months to March 2023).

Thus, Raia Drogasil has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Consumer Retailing industry average of 11% it's much better.

View our latest analysis for Raia Drogasil

Above you can see how the current ROCE for Raia Drogasil 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 Raia Drogasil.

So How Is Raia Drogasil's ROCE Trending?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 18% for the last five years, and the capital employed within the business has risen 171% in that time. 18% is a pretty standard return, and it provides some comfort knowing that Raia Drogasil has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a separate but related note, it's important to know that Raia Drogasil 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Raia Drogasil's ROCE

The main thing to remember is that Raia Drogasil has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 103% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Raia Drogasil could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Raia Drogasil 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.