Guararapes Confecções (BVMF: GUAR3) could have problems allocating its capital
If we are to find a title that could multiply over the long term, what are the underlying trends that we need to look for? Ideally, a business will display two trends; first growth to recover on capital employed (ROCE) and on the other hand, an increase amount capital employed. Basically, it means that a business has profitable initiatives that it can keep reinvesting in, which is a hallmark of a dialing machine. In light of this, when we looked at Guararapes Confecs (BVMF: GUAR3) and its ROCE trend, we weren’t exactly thrilled.
Return on capital employed (ROCE): what is it?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for Guararapes Confecções, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.033 = 285 million reais ÷ (13 billion reais – 4.4 billion reais) (Based on the last twelve months up to June 2021).
So, Guararapes Confecções has a ROCE of 3.3%. At the end of the day, that’s a low return and it’s below the luxury industry average of 11%.
Check out our latest review for Guararapes Confecções
In the graph above, we measured Guararapes Confecções past ROCE against its past performance, but the future is arguably more important. If you wish, here you can view analyst forecasts covering Guararapes Confecções for free.
What can we say about the ROCE trend of Guararapes Confecções?
When we looked at the ROCE trend at Guararapes Confecções, we didn’t gain much trust. About five years ago, returns on capital were 7.8%, but since then they have fallen to 3.3%. On the flip side, the company has employed more capital with no corresponding improvement in sales over the past year, which might suggest that these investments are longer-term games. It may take some time for the business to begin to see a change in the benefits of these investments.
Our opinion on the ROCE of Guararapes Confecções
In summary, while we are somewhat encouraged by the reinvestment of Guararapes Confecções in its own business, we are aware that the returns are diminishing. Given that the stock has gained an impressive 76% over the past five years, investors must think there are better things to come. However, unless these underlying trends turn more positive, our hopes would not be too high.
Guararapes Confecções does carry certain risks, however, we have found 4 warning signs in our investment analysis, and 1 of them is a bit rude …
Although Guararapes Confecções does not generate the highest yield, check out this free list of companies that generate high returns on equity with strong balance sheets.
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