Yduqs Participações (BVMF:YDUQ3) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Yduqs Participações (BVMF:YDUQ3) and its ROCE trend, we weren't exactly thrilled.

What Is 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. To calculate this metric for Yduqs Participações, this is the formula:

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

0.12 = R$972m ÷ (R$9.8b - R$1.7b) (Based on the trailing twelve months to September 2023).

So, Yduqs Participações has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Consumer Services industry average of 9.0% it's much better.

View our latest analysis for Yduqs Participações

Above you can see how the current ROCE for Yduqs Participações compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Yduqs Participações here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Yduqs Participações doesn't inspire confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 12%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Yduqs Participações' ROCE

While returns have fallen for Yduqs Participações in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 6.3% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Yduqs Participações does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.

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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.