Some Investors May Be Worried About Ultrapar Participações' (BVMF:UGPA3) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Ultrapar Participações (BVMF:UGPA3) and its ROCE trend, we weren't exactly thrilled.

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

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. To calculate this metric for Ultrapar Participações, this is the formula:

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

0.059 = R$1.7b ÷ (R$37b - R$9.2b) (Based on the trailing twelve months to March 2021).

Therefore, Ultrapar Participações has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 8.1%.

Check out our latest analysis for Ultrapar Participações

In the above chart we have measured Ultrapar Participações' 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 Ultrapar Participações here for free.

What Does the ROCE Trend For Ultrapar Participações Tell Us?

When we looked at the ROCE trend at Ultrapar Participações, we didn't gain much confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 5.9%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that Ultrapar Participações is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 43% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing: We've identified 3 warning signs with Ultrapar Participações (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

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