Investors Could Be Concerned With Arco Platform's (NASDAQ:ARCE) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at Arco Platform (NASDAQ:ARCE) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Arco Platform is:

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

0.04 = R$143m ÷ (R$4.6b - R$980m) (Based on the trailing twelve months to December 2020).

So, Arco Platform has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 7.7%.

See our latest analysis for Arco Platform

Above you can see how the current ROCE for Arco Platform compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

Unfortunately, the trend isn't great with ROCE falling from 18% four years ago, while capital employed has grown 1,217%. That being said, Arco Platform raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Arco Platform might not have received a full period of earnings contribution from it.

The Bottom Line On Arco Platform's 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 Arco Platform. However, despite the promising trends, the stock has fallen 52% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know about the risks facing Arco Platform, we've discovered 3 warning signs that you should be aware of.

While Arco Platform isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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