Returns On Capital Signal Tricky Times Ahead For Natura &Co Holding (BVMF:NTCO3)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Natura &Co Holding (BVMF:NTCO3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Natura &Co Holding, this is the formula:

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

0.025 = R$980m ÷ (R$51b - R$12b) (Based on the trailing twelve months to June 2023).

So, Natura &Co Holding has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 10%.

Check out 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.

What Can We Tell From Natura &Co Holding's ROCE Trend?

On the surface, the trend of ROCE at Natura &Co Holding doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.5% from 11% five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Natura &Co Holding's ROCE

To conclude, we've found that Natura &Co Holding is reinvesting in the business, but returns have been falling. Moreover, since the stock has crumbled 71% over the last three years, it appears investors are expecting the worst. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we've found 1 warning sign for Natura &Co Holding that we think you should be aware of.

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.