Investors Could Be Concerned With Natura &Co Holding's (BVMF:NTCO3) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Natura &Co Holding (BVMF:NTCO3) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Natura &Co Holding:

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

0.032 = R$1.4b ÷ (R$54b - R$12b) (Based on the trailing twelve months to June 2022).

Therefore, Natura &Co Holding has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 12%.

Check out 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, you can check out the forecasts from the analysts covering Natura &Co Holding here for free.

What Does the ROCE Trend For Natura &Co Holding Tell Us?

When we looked at the ROCE trend at Natura &Co Holding, we didn't gain much confidence. To be more specific, ROCE has fallen from 36% over the last five years. However it looks like Natura &Co Holding 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'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.

On a side note, Natura &Co Holding has done well to pay down its current liabilities to 21% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, Natura &Co Holding is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Moreover, since the stock has crumbled 72% over the last year, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Natura &Co Holding has the makings of a multi-bagger.

Natura &Co Holding does have some risks though, and we've spotted 1 warning sign for Natura &Co Holding that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.