Capital Allocation Trends At Lojas Renner (BVMF:LREN3) Aren't Ideal

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at Lojas Renner (BVMF:LREN3), it didn't seem to tick all of these boxes.

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 Lojas Renner, this is the formula:

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

0.097 = R$877m ÷ (R$15b - R$5.6b) (Based on the trailing twelve months to December 2020).

So, Lojas Renner has an ROCE of 9.7%. In absolute terms, that's a low return, but it's much better than the Multiline Retail industry average of 4.2%.

Check out our latest analysis for Lojas Renner

Above you can see how the current ROCE for Lojas Renner 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 Renner.

What Can We Tell From Lojas Renner's ROCE Trend?

When we looked at the ROCE trend at Lojas Renner, we didn't gain much confidence. Around five years ago the returns on capital were 27%, but since then they've fallen to 9.7%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Lojas Renner have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 162% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we've found 1 warning sign for Lojas Renner that we think you should be aware of.

While Lojas Renner 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. 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.
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