Grupo Casas Bahia (BVMF:BHIA3) Will Want To Turn Around Its Return Trends

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at Grupo Casas Bahia (BVMF:BHIA3), it didn't seem to tick all of these boxes.

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. To calculate this metric for Grupo Casas Bahia, this is the formula:

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

0.026 = R$371m ÷ (R$32b - R$18b) (Based on the trailing twelve months to September 2023).

So, Grupo Casas Bahia has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 8.4%.

View our latest analysis for Grupo Casas Bahia

In the above chart we have measured Grupo Casas Bahia'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 Grupo Casas Bahia for free.

So How Is Grupo Casas Bahia's ROCE Trending?

On the surface, the trend of ROCE at Grupo Casas Bahia doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.6% from 32% five years ago. However it looks like Grupo Casas Bahia 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.

On a related note, Grupo Casas Bahia has decreased its current liabilities to 56% 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line On Grupo Casas Bahia's ROCE

In summary, Grupo Casas Bahia 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 94% over the last five years, it appears investors are expecting the worst. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Grupo Casas Bahia does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit concerning...

While Grupo Casas Bahia 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.