Magazine Luiza's (BVMF:MGLU3) Returns Have Hit A Wall

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Magazine Luiza (BVMF:MGLU3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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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. To calculate this metric for Magazine Luiza, this is the formula:

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

0.065 = R$1.3b ÷ (R$37b - R$17b) (Based on the trailing twelve months to December 2024).

Thus, Magazine Luiza has an ROCE of 6.5%. Even though it's in line with the industry average of 6.5%, it's still a low return by itself.

See our latest analysis for Magazine Luiza

Above you can see how the current ROCE for Magazine Luiza compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Magazine Luiza .

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Magazine Luiza. The company has employed 75% more capital in the last five years, and the returns on that capital have remained stable at 6.5%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Magazine Luiza's current liabilities are still rather high at 45% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

Long story short, while Magazine Luiza has been reinvesting its capital, the returns that it's generating haven't increased. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 92% in the last five years. Therefore based on the analysis done in this article, we don't think Magazine Luiza has the makings of a multi-bagger.

On a final note, we found 2 warning signs for Magazine Luiza (1 shouldn't be ignored) you should be aware of.

While Magazine Luiza 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.