If we want to find a stock that can multiply over the long term, what are the underlying trends we should be looking for? One common approach is to try to find a company returns on capital employed (ROCE), which are rising in tandem with growth sum of capital employed. Simply put, these types of businesses are compact machines, meaning they continually reinvest their earnings at higher rates of return. Although when we looked Locaweb Internet Services: (BVMF:LWSA3) , didn’t seem to tick all of these boxes.
Return on Capital Employed (ROCE). What is it:
For those who aren’t sure what ROCE is, it measures the amount of profit a company can generate from the capital it uses in its business. For Locaweb Serviços de Internet, the following formula is used to calculate this metric:
Return on capital employed = earnings before interest and taxes (EBIT) ÷ (Total assets – current liabilities)
0.016 = R$59m ÷ (R$4.7b – R$1.1b) (Based on last twelve months to December 2022).
Therefore, Locaweb Serviços de Internet has a ROCE of 1.6%. After all, that’s a low return, and it underperforms the IT industry average by 13%.
Check out our latest analysis for Locaweb Serviços de Internet
Above you can see how Locaweb Serviços de Internet’s current ROCE compares to its past return on equity, but you can tell a lot from the past. If you are interested, you can view analysts’ forecasts on our website free of charge report on company analysts’ forecasts.
SWOT analysis for Locaweb Serviços de Internet
- Debt is not seen as a risk.
- Dividends are low compared to the top 25% of dividend payers in the IT market.
- Expensive based on P/E ratio and estimated fair value.
- Annual revenue is forecast to grow faster than the Brazilian market.
- Revenue is forecast to grow at a slower rate than 20% per year.
What can we tell from Locaweb Serviços de Internet’s ROCE trend?
On the surface, the ROCE trend at Locaweb Serviços de Internet does not inspire confidence. To be more specific, ROCE has declined from 29% over the past five years. However, given that capital employed and revenues have both increased, it appears that the business is currently trending upward on the back of short-term returns. If these investments are successful, it could bode very well for long-term stock performance.
On a side note, Locaweb Serviços de Internet did well with current liabilities down to 23% of total assets. That may partly explain why ROCE fell. Furthermore, this can reduce some aspects of risk for the business, as now the company’s suppliers or short-term creditors are less likely to finance its operations. Some would argue that this reduces the efficiency of the ROCE generating business, as it is now financing more operations with its own funds.
Although Locaweb Serviços de Internet’s revenues have decreased recently, we are encouraged to see that sales are increasing and that the business is reinvesting in its operations. In light of this, the stock is up just 5.5% over the past three years. Therefore, we would recommend that you take a closer look at this stock to confirm whether it has the potential to be a good investment.
One more thing should be noted. we discovered 2 warning signs With and understanding Locaweb Serviços de Internet should be part of your investment process.
While Locaweb Serviços de Internet may not currently be earning the highest returns, we have compiled a list of companies that are currently earning over 25% return on equity. Check this out free of charge list here.
Valuation is complicated, but we help make it simple.
Find out if Locaweb Serviços de Internet is potentially overvalued or undervalued by checking out our comprehensive analysis, which includes: fair value estimates, risks and caveats, dividends, insider trading and financial health.
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