Returns On Capital Signal Tricky Times Ahead For Sequoia Logística e Transportes (BVMF:SEQL3)

What trends should we look for it we want to identify stocks that can 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Sequoia Logística e Transportes (BVMF:SEQL3), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Sequoia Logística e Transportes is:

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

0.0099 = R$14m ÷ (R$2.0b - R$527m) (Based on the trailing twelve months to March 2023).

Thus, Sequoia Logística e Transportes has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Logistics industry average of 9.1%.

View our latest analysis for Sequoia Logística e Transportes

In the above chart we have measured Sequoia Logística e Transportes' 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 Sequoia Logística e Transportes' ROCE Trending?

In terms of Sequoia Logística e Transportes' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.0% from 10% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Sequoia Logística e Transportes' ROCE

In summary, Sequoia Logística e Transportes is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Moreover, since the stock has crumbled 71% over the last year, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Sequoia Logística e Transportes has the makings of a multi-bagger.

If you want to know some of the risks facing Sequoia Logística e Transportes we've found 4 warning signs (2 can't be ignored!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.