Returns On Capital At Raia Drogasil (BVMF:RADL3) Have Stalled

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Raia Drogasil's (BVMF:RADL3) trend of ROCE, we liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Raia Drogasil:

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

0.18 = R$1.9b ÷ (R$18b - R$7.0b) (Based on the trailing twelve months to June 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.

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'd like, you can check out the forecasts from the analysts covering Raia Drogasil here for free.

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 18% and the business has deployed 150% more capital into its operations. 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.

The Bottom Line On Raia Drogasil's ROCE

In the end, Raia Drogasil has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 126% 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 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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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.