Ultrapar Participações (BVMF:UGPA3) Is Reinvesting At Lower Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Ultrapar Participações (BVMF:UGPA3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Ultrapar Participações is:

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

0.053 = R$1.4b ÷ (R$36b - R$9.2b) (Based on the trailing twelve months to December 2020).

Thus, Ultrapar Participações has an ROCE of 5.3%. On its own, that's a low figure but it's around the 6.3% average generated by the Oil and Gas industry.

Check out our latest analysis for Ultrapar Participações

Above you can see how the current ROCE for Ultrapar 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 Ultrapar Participações here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Ultrapar Participações doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.3% from 18% five years ago. However it looks like Ultrapar Participações might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Ultrapar Participações' ROCE

In summary, Ultrapar Participações is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 34% in the last five years. 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.

Ultrapar Participações does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

While Ultrapar Participações 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. 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.
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