Qualicorp Consultoria e Corretora de Seguros (BVMF:QUAL3) Will Be Looking To Turn Around Its Returns

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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. In light of that, from a first glance at Qualicorp Consultoria e Corretora de Seguros (BVMF:QUAL3), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.056 = R$163m ÷ (R$4.4b - R$1.5b) (Based on the trailing twelve months to September 2024).

Thus, Qualicorp Consultoria e Corretora de Seguros has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 11%.

Check out 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Qualicorp Consultoria e Corretora de Seguros .

What Can We Tell From Qualicorp Consultoria e Corretora de Seguros' ROCE Trend?

The trend of ROCE at Qualicorp Consultoria e Corretora de Seguros is showing some signs of weakness. The company used to generate 18% on its capital five years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 23% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 34%, which has impacted the ROCE. 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 Bottom Line

In summary, it's unfortunate that Qualicorp Consultoria e Corretora de Seguros is shrinking its capital base and also generating lower returns. Unsurprisingly then, the stock has dived 94% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Qualicorp Consultoria e Corretora de Seguros we've found 4 warning signs (2 are concerning!) that you should be aware of before investing here.

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.