Returns At StoneCo (NASDAQ:STNE) Appear To Be Weighed Down

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at StoneCo (NASDAQ:STNE), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on StoneCo is:

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

0.039 = R$778m ÷ (R$40b - R$20b) (Based on the trailing twelve months to September 2021).

Thus, StoneCo has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the IT industry average of 14%.

Check out our latest analysis for StoneCo

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

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at StoneCo. The company has consistently earned 3.9% for the last four years, and the capital employed within the business has risen 770% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, StoneCo has done well to reduce current liabilities to 50% of total assets over the last four 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. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

What We Can Learn From StoneCo's ROCE

As we've seen above, StoneCo's returns on capital haven't increased but it is reinvesting in the business. And in the last three years, the stock has given away 37% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

StoneCo does have some risks though, and we've spotted 1 warning sign for StoneCo that you might be interested in.

While StoneCo 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.