Be Wary Of Natura &Co Holding (BVMF:NTCO3) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Natura &Co Holding (BVMF:NTCO3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 Natura &Co Holding is:

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

0.039 = R$1.8b ÷ (R$62b - R$15b) (Based on the trailing twelve months to March 2021).

Thus, Natura &Co Holding has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 13%.

See our latest analysis for Natura &Co Holding

In the above chart we have measured Natura &Co Holding's 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 report for Natura &Co Holding.

So How Is Natura &Co Holding's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 27% five years ago, while capital employed has grown 986%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Natura &Co Holding probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Natura &Co Holding has done well to pay down its current liabilities to 24% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Natura &Co Holding's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Natura &Co Holding. And the stock has followed suit returning a meaningful 42% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to know some of the risks facing Natura &Co Holding we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Natura &Co Holding 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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