Investors Met With Slowing Returns on Capital At Light (BVMF:LIGT3)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Light (BVMF:LIGT3), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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 Light:

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

0.097 = R$2.3b ÷ (R$28b - R$4.8b) (Based on the trailing twelve months to June 2021).

Thus, Light has an ROCE of 9.7%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 12%.

View our latest analysis for Light

Above you can see how the current ROCE for Light 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 Light.

So How Is Light's ROCE Trending?

The returns on capital haven't changed much for Light in recent years. The company has employed 139% more capital in the last five years, and the returns on that capital have remained stable at 9.7%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Light has done well to reduce current liabilities to 17% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

Our Take On Light's ROCE

Long story short, while Light has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly, the stock has only gained 8.1% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we found 5 warning signs for Light (1 can't be ignored) you should be aware of.

While Light 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.
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