Qualicorp Consultoria e Corretora de Seguros (BVMF:QUAL3) Is Finding It Tricky To Allocate Its Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Qualicorp Consultoria e Corretora de Seguros (BVMF:QUAL3), we weren't too upbeat about how things were going.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Qualicorp Consultoria e Corretora de Seguros is:

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

0.029 = R$95m ÷ (R$4.7b - R$1.4b) (Based on the trailing twelve months to September 2023).

So, Qualicorp Consultoria e Corretora de Seguros has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 9.5%.

See our latest analysis for Qualicorp Consultoria e Corretora de Seguros

In the above chart we have measured Qualicorp Consultoria e Corretora de Seguros' 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 Qualicorp Consultoria e Corretora de Seguros for free.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Qualicorp Consultoria e Corretora de Seguros. To be more specific, the ROCE was 18% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Qualicorp Consultoria e Corretora de Seguros becoming one if things continue as they have.

On a side note, Qualicorp Consultoria e Corretora de Seguros' current liabilities have increased over the last five years to 30% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. We expect this has contributed to the stock plummeting 80% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Qualicorp Consultoria e Corretora de Seguros (2 are concerning) you should be aware of.

While Qualicorp Consultoria e Corretora de Seguros isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.