Pet Center Comércio e Participações (BVMF:PETZ3) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Pet Center Comércio e Participações (BVMF:PETZ3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Pet Center Comércio e Participações:

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

0.048 = R$139m ÷ (R$3.6b - R$682m) (Based on the trailing twelve months to September 2022).

So, Pet Center Comércio e Participações has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 9.2%.

View our latest analysis for Pet Center Comércio e Participações

Above you can see how the current ROCE for Pet Center Comércio e Participações compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Pet Center Comércio e Participações here for free.

What Can We Tell From Pet Center Comércio e Participações' ROCE Trend?

On the surface, the trend of ROCE at Pet Center Comércio e Participações doesn't inspire confidence. To be more specific, ROCE has fallen from 9.5% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Pet Center Comércio e Participações has decreased its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Pet Center Comércio e Participações is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 60% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Pet Center Comércio e Participações does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Pet Center Comércio e Participações 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.