Returns On Capital Signal Tricky Times Ahead For Lojas Renner (BVMF:LREN3)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Lojas Renner (BVMF:LREN3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Lojas Renner:

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

0.095 = R$1.2b ÷ (R$21b - R$7.9b) (Based on the trailing twelve months to June 2022).

So, Lojas Renner has an ROCE of 9.5%. Even though it's in line with the industry average of 9.7%, it's still a low return by itself.

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.

How Are Returns Trending?

On the surface, the trend of ROCE at Lojas Renner doesn't inspire confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 9.5%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Lojas Renner's ROCE

While returns have fallen for Lojas Renner in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 17% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One more thing to note, we've identified 1 warning sign with Lojas Renner and understanding this should be part of your investment process.

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. 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.