Natura &Co Holding (BVMF:NTCO3) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

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 Natura &Co Holding is:

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

0.026 = R$1.1b ÷ (R$55b - R$12b) (Based on the trailing twelve months to September 2022).

Thus, Natura &Co Holding has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 11%.

View our latest analysis for Natura &Co Holding

Above you can see how the current ROCE for Natura &Co Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Natura &Co Holding.

How Are Returns Trending?

When we looked at the ROCE trend at Natura &Co Holding, we didn't gain much confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 2.6%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

The Bottom Line

To conclude, we've found that Natura &Co Holding is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 55% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

While Natura &Co Holding 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.