Here’s what the returns on capital of Locaweb Servios de Internet (BVMF:LWSA3) are about

What are the first trends we should look for to identify a stock that could multiply in value over the long term? A common approach is to try and find a company with come back on invested capital (ROCE) which are increasing, coinciding with growth amount of capital employed. Ultimately, this shows that this is a company that is reinvesting profits at increasing rates of return. However, having briefly looked at the numbers, we don’t think so Locaweb Internet services (BVMF:LWSA3) has the makings of a multi-bagger in the future, but let’s look at why that might be.

Understanding Return on Capital Invested (ROCE)

For the uninitiated, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Locaweb Servios de Internet, this is the formula:

Return on Invested Capital = Earnings Before Interest and Tax (EBIT) (Total Assets – Current Liabilities)

0.021 = R$76 million (R$4.7 billion – R$1.1 billion) (Based on twelve months prior to March 2023).

AS, Locaweb Servios de Internet has a ROCE of 2.1%. In absolute terms, that’s a low return, and it also underperforms the IT industry average by 13%.

Check out our latest analysis for Locaweb Servios de Internet

In the chart above, we measured Locaweb Servios de Internet’s prior ROCE relative to its prior performance, but the future is arguably more important. If you wish, you can check analyst forecasts covering Locaweb Servios de Internet here for free.

The ROCE trend

On the surface, ROCE performance at Locaweb Servios de Internet does not inspire confidence. To be more specific, ROCE is down by 29% in the past five years. However, as both capital employed and revenues have increased, it appears that the business is currently pursuing growth, as a result of short-term returns. If these investments are successful, that can bode well for long-term stock performance.

On a side note, Locaweb Servios de Internet was right to reduce its current liabilities to 23% of total assets. So we could relate some of that to the decrease in ROCE. In effect, this means that their suppliers or short-term creditors are financing the business less, which reduces some elements of risk. Since the company is essentially funding most of its operations with its own money, it could be argued that this has made the company less efficient at generating ROCE.

The bottom line on Locaweb Servios de Internet’s ROCE

While returns on capital have declined in the short term, we find it promising that revenue and capital employed have both increased for Locaweb Servios de Internet. However, these growth trends have not led to growth returns, as the stock is down 35% over the past three years. As a result, we recommend further researching this stock to find out what other business fundamentals it can show us.

If you want to know the risks that Locaweb Servios de Internet faces, we have found out 2 warning signs which you should be aware of.

While Locaweb Servios de Internet may not currently be earning the highest returns, we have compiled a list of companies currently earning over 25% return on equity. Check this out free list here.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using unbiased methodology only and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis driven by fundamental data. Please 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 of the stocks mentioned.