Marisa Lojas (BVMF:AMAR3) Has Some Way To Go To Become A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. 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 Marisa Lojas (BVMF:AMAR3) 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Marisa Lojas, this is the formula:

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

0.02 = R$50m ÷ (R$3.6b - R$1.2b) (Based on the trailing twelve months to June 2022).

So, Marisa Lojas has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 9.3%.

Check out the opportunities and risks within the XX Multiline Retail industry.

In the above chart we have measured Marisa Lojas' 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 Marisa Lojas here for free.

So How Is Marisa Lojas' ROCE Trending?

In terms of Marisa Lojas' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 2.0% for the last five years, and the capital employed within the business has risen 65% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 32% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

In Conclusion...

In conclusion, Marisa Lojas has been investing more capital into the business, but returns on that capital haven't increased. Moreover, since the stock has crumbled 72% over the last five years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Marisa Lojas has the makings of a multi-bagger.

On a separate note, we've found 2 warning signs for Marisa Lojas you'll probably want to know about.

While Marisa Lojas 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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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.