Sequoia Logística e Transportes (BVMF:SEQL3) 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? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. To calculate this metric for Sequoia Logística e Transportes, this is the formula:

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

0.033 = R$46m ÷ (R$2.0b - R$564m) (Based on the trailing twelve months to June 2022).

Thus, Sequoia Logística e Transportes has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 11%.

Check out 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.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Sequoia Logística e Transportes doesn't inspire confidence. Over the last four years, returns on capital have decreased to 3.3% from 10.0% four years ago. 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 On Sequoia Logística e Transportes' 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 Sequoia Logística e Transportes. These growth trends haven't led to growth returns though, since the stock has fallen 59% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to continue researching Sequoia Logística e Transportes, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.