Investors Could Be Concerned With Falabella's (SNSE:FALABELLA) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Falabella (SNSE:FALABELLA) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Falabella is:

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

0.031 = CL$629b ÷ (CL$24t - CL$3.2t) (Based on the trailing twelve months to June 2024).

Therefore, Falabella has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 8.0%.

Check out our latest analysis for Falabella

In the above chart we have measured Falabella's 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 analyst report for Falabella .

What Does the ROCE Trend For Falabella Tell Us?

In terms of Falabella's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 5.7% over the last five years. 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.

The Bottom Line On Falabella's ROCE

To conclude, we've found that Falabella is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 14% in the last five years. Therefore based on the analysis done in this article, we don't think Falabella has the makings of a multi-bagger.

One final note, you should learn about the 3 warning signs we've spotted with Falabella (including 1 which shouldn't be ignored) .

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.