We're Watching These Trends At Locaweb Serviços de Internet (BVMF:LWSA3)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Locaweb Serviços de Internet:

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

0.064 = R$52m ÷ (R$1.2b - R$407m) (Based on the trailing twelve months to September 2020).

Thus, Locaweb Serviços de Internet has an ROCE of 6.4%. Even though it's in line with the industry average of 6.4%, it's still a low return by itself.

Check out our latest analysis for Locaweb Serviços de Internet

In the above chart we have measured Locaweb Serviços de Internet's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Locaweb Serviços de Internet's ROCE Trending?

In terms of Locaweb Serviços de Internet's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 18% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Locaweb Serviços de Internet is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 464% to shareholders in the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing to note, we've identified 1 warning sign with Locaweb Serviços de Internet and understanding it should be part of your investment process.

While Locaweb Serviços de Internet isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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