Should We Be Excited About The Trends Of Returns At Sinqia (BVMF:SQIA3)?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Sinqia (BVMF:SQIA3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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 Sinqia is:

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

0.0019 = R$1.1m ÷ (R$611m - R$67m) (Based on the trailing twelve months to September 2020).

So, Sinqia has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Software industry average of 11%.

See our latest analysis for Sinqia

Above you can see how the current ROCE for Sinqia 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 Sinqia here for free.

What Can We Tell From Sinqia's ROCE Trend?

In terms of Sinqia's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 9.8% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Sinqia's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Sinqia. And long term investors must be optimistic going forward because the stock has returned a huge 951% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

While Sinqia doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While Sinqia 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. 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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