Raia Drogasil (BVMF:RADL3) Will Will Want To Turn Around Its Return Trends

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after briefly looking over the numbers, we don't think Raia Drogasil (BVMF:RADL3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Raia Drogasil, this is the formula:

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

0.11 = R$955m ÷ (R$14b - R$4.8b) (Based on the trailing twelve months to December 2020).

Thus, Raia Drogasil has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.4% generated by the Consumer Retailing industry.

Check out our latest analysis for Raia Drogasil

In the above chart we have measured Raia Drogasil's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Raia Drogasil's ROCE Trending?

When we looked at the ROCE trend at Raia Drogasil, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 11% from 16% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Raia Drogasil's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Raia Drogasil. And the stock has done incredibly well with a 143% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

Raia Drogasil does have some risks though, and we've spotted 1 warning sign for Raia Drogasil that you might be interested in.

While Raia Drogasil may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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