Livetech da Bahia Indústria e Comércio (BVMF:LVTC3) 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? 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. However, after briefly looking over the numbers, we don't think Livetech da Bahia Indústria e Comércio (BVMF:LVTC3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Livetech da Bahia Indústria e Comércio, this is the formula:

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

0.062 = R$73m ÷ (R$1.5b - R$282m) (Based on the trailing twelve months to March 2023).

Therefore, Livetech da Bahia Indústria e Comércio has an ROCE of 6.2%. In absolute terms, that's a low return but it's around the Communications industry average of 7.6%.

See our latest analysis for Livetech da Bahia Indústria e Comércio

Above you can see how the current ROCE for Livetech da Bahia Indústria e Comércio 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 Livetech da Bahia Indústria e Comércio.

SWOT Analysis for Livetech da Bahia Indústria e Comércio

The Trend Of ROCE

On the surface, the trend of ROCE at Livetech da Bahia Indústria e Comércio doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 6.2%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Livetech da Bahia Indústria e Comércio 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, Livetech da Bahia Indústria e Comércio is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 13% over the last year, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Livetech da Bahia Indústria e Comércio does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those is potentially serious...

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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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.