Returns Are Gaining Momentum At Raia Drogasil (BVMF:RADL3)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Raia Drogasil (BVMF:RADL3) 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. Analysts use this formula to calculate it for Raia Drogasil:

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

0.17 = R$2.2b ÷ (R$21b - R$7.9b) (Based on the trailing twelve months to June 2024).

Thus, Raia Drogasil has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 8.7% generated by the Consumer Retailing industry.

Check out 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 analyst report for Raia Drogasil .

How Are Returns Trending?

Investors would be pleased with what's happening at Raia Drogasil. Over the last five years, returns on capital employed have risen substantially to 17%. The amount of capital employed has increased too, by 66%. So we're very much inspired by what we're seeing at Raia Drogasil thanks to its ability to profitably reinvest capital.

Our Take On Raia Drogasil's ROCE

In summary, it's great to see that Raia Drogasil can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 52% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 1 warning sign facing Raia Drogasil that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.