The Returns On Capital At Lojas Quero-Quero (BVMF:LJQQ3) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Lojas Quero-Quero (BVMF:LJQQ3) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Lojas Quero-Quero, this is the formula:

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

0.057 = R$106m ÷ (R$2.8b - R$980m) (Based on the trailing twelve months to September 2022).

Therefore, Lojas Quero-Quero has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 9.2%.

View 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.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Lojas Quero-Quero, we didn't gain much confidence. Around five years ago the returns on capital were 28%, but since then they've fallen to 5.7%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Lojas Quero-Quero has decreased its current liabilities to 35% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

While returns have fallen for Lojas Quero-Quero in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 64% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Lojas Quero-Quero does have some risks, we noticed 5 warning signs (and 1 which is concerning) we think you should know about.

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.