Capital Allocation Trends At Lojas Quero-Quero (BVMF:LJQQ3) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Lojas Quero-Quero (BVMF:LJQQ3), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Lojas Quero-Quero is:

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

0.094 = R$155m ÷ (R$2.6b - R$903m) (Based on the trailing twelve months to March 2022).

Thus, Lojas Quero-Quero has an ROCE of 9.4%. On its own, that's a low figure but it's around the 11% average generated by the Specialty Retail industry.

See our latest analysis for Lojas Quero-Quero

Above you can see how the current ROCE for Lojas Quero-Quero 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 Lojas Quero-Quero.

So How Is Lojas Quero-Quero's ROCE Trending?

When we looked at the ROCE trend at Lojas Quero-Quero, we didn't gain much confidence. To be more specific, ROCE has fallen from 21% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Lojas Quero-Quero has done well to pay down its current liabilities to 35% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 Bottom Line On Lojas Quero-Quero's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Lojas Quero-Quero is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 64% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 4 warning signs we've spotted with Lojas Quero-Quero (including 1 which doesn't sit too well with us) .

While Lojas Quero-Quero 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.