Capital Allocation Trends At Locaweb Serviços de Internet (BVMF:LWSA3) Aren't Ideal

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Locaweb Serviços de Internet (BVMF:LWSA3) 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?

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. The formula for this calculation on Locaweb Serviços de Internet is:

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

0.048 = R$48m ÷ (R$1.5b - R$451m) (Based on the trailing twelve months to December 2020).

Thus, Locaweb Serviços de Internet has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the IT industry average of 7.5%.

Check out our latest analysis for Locaweb Serviços de Internet

Above you can see how the current ROCE for Locaweb Serviços de Internet 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 Locaweb Serviços de Internet.

What The Trend Of ROCE Can Tell Us

In terms of Locaweb Serviços de Internet's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.8% from 14% five years ago. 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 Locaweb Serviços de Internet's ROCE

While returns have fallen for Locaweb Serviços de Internet in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 314% to shareholders in the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Locaweb Serviços de Internet does come with some risks, and we've found 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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