Be Wary Of Sequoia Logística e Transportes (BVMF:SEQL3) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Sequoia Logística e Transportes (BVMF:SEQL3) and its ROCE trend, we weren't exactly thrilled.

What is 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. Analysts use this formula to calculate it for Sequoia Logística e Transportes:

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

0.025 = R$37m ÷ (R$2.0b - R$517m) (Based on the trailing twelve months to December 2021).

Thus, Sequoia Logística e Transportes has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 12%.

View our latest analysis for Sequoia Logística e Transportes

Above you can see how the current ROCE for Sequoia Logística e Transportes 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 Sequoia Logística e Transportes.

What Does the ROCE Trend For Sequoia Logística e Transportes Tell Us?

When we looked at the ROCE trend at Sequoia Logística e Transportes, we didn't gain much confidence. Around four years ago the returns on capital were 11%, but since then they've fallen to 2.5%. 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.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Sequoia Logística e Transportes. These growth trends haven't led to growth returns though, since the stock has fallen 60% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 3 warning signs we've spotted with Sequoia Logística e Transportes (including 1 which is potentially serious) .

While Sequoia Logística e Transportes 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.