Some Investors May Be Worried About Vamos Locação de Caminhões Máquinas e Equipamentos' (BVMF:VAMO3) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Vamos Locação de Caminhões Máquinas e Equipamentos (BVMF:VAMO3) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for Vamos Locação de Caminhões Máquinas e Equipamentos:

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

0.084 = R$754m ÷ (R$10b - R$1.2b) (Based on the trailing twelve months to December 2021).

Thus, Vamos Locação de Caminhões Máquinas e Equipamentos has an ROCE of 8.4%. On its own, that's a low figure but it's around the 9.1% average generated by the Transportation industry.

View our latest analysis for Vamos Locação de Caminhões Máquinas e Equipamentos

Above you can see how the current ROCE for Vamos Locação de Caminhões Máquinas e Equipamentos 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 Vamos Locação de Caminhões Máquinas e Equipamentos here for free.

So How Is Vamos Locação de Caminhões Máquinas e Equipamentos' ROCE Trending?

When we looked at the ROCE trend at Vamos Locação de Caminhões Máquinas e Equipamentos, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 8.4% from 11% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Vamos Locação de Caminhões Máquinas e Equipamentos has done well to pay down its current liabilities to 12% of total assets. That could partly explain why the ROCE has dropped. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Vamos Locação de Caminhões Máquinas e Equipamentos is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 46% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we found 4 warning signs for Vamos Locação de Caminhões Máquinas e Equipamentos (2 can't be ignored) you should be aware of.

While Vamos Locação de Caminhões Máquinas e Equipamentos 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.