Capital Allocation Trends At Vasta Platform (NASDAQ:VSTA) Aren't Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Vasta Platform (NASDAQ:VSTA), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Vasta Platform:

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

0.0097 = R$65m ÷ (R$7.4b - R$771m) (Based on the trailing twelve months to June 2023).

Therefore, Vasta Platform has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 6.7%.

Check out our latest analysis for Vasta Platform

In the above chart we have measured Vasta Platform'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 report on analyst forecasts for the company.

What Does the ROCE Trend For Vasta Platform Tell Us?

When we looked at the ROCE trend at Vasta Platform, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 1.0% from 2.4% four years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Vasta 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 Vasta Platform. Despite these promising trends, the stock has collapsed 75% over the last three years, so there could be other factors hurting the company's prospects. Therefore, we'd suggest researching the stock further to uncover more about the business.

If you're still interested in Vasta Platform it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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.