Capital allocation trends at Lojas Quero-Quero (BVMF: LJQQ3) are less than ideal

If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. A common approach is to try to find a company with Return on capital employed (ROCE) which is increasing, in line with growth amount capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. However, after investigating Lojas Quero-Quero (BVMF:LJQQ3), we don’t think current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Lojas Quero-Quero is:

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

0.094 = R$155 million ÷ (R$2.6 billion – R$903 million) (Based on the last twelve months to March 2022).

Thereby, Lojas Quero-Quero has a ROCE of 9.4%. That’s a low number on its own, but it’s around the 11% average generated by the specialty retail industry.

See our latest review for Lojas Quero-Quero

BOVESPA:LJQQ3 Return on Capital Employed June 7, 2022

Above, you can see how Lojas Quero-Quero’s current ROCE compares to its past returns on capital, but you can’t tell much about the past. If you want to see what analysts predict for the future, you should check out our free report for Lojas Quero-Quero.

So, what is the Lojas Quero-Quero ROCE trend?

When we looked at the ROCE trend in Lojas Quero-Quero, we didn’t gain much confidence. To be more specific, ROCE has fallen by 21% over the past five years. Although, given that revenue and the amount of assets used in the business have increased, it could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. If these investments prove successful, it can bode very well for long-term stock performance.

By the way, Lojas Quero-Quero did well to repay its current liabilities at 35% of total assets. This could partly explain why ROCE fell. In effect, this means that their suppliers or short-term creditors finance the business less, which reduces certain elements of risk. Since the company is essentially funding more of its operations with its own money, one could argue that this has made the company less efficient at generating a return on investment.

The basics of Lojas Quero-Quero’s ROCE

In summary, despite lower returns in the short term, we are encouraged to see that Lojas Quero-Quero is reinvesting for growth and has thus increased its sales. These growth trends have not led to returns to growth, however, as the stock has fallen 64% in the past year. So we think it would be worth taking a closer look at this stock as the trends look encouraging.

One last note, you should inquire about the 4 warning signs we spotted with Lojas Quero-Quero (including 1 that didn’t suit us too much).

Although Lojas Quero-Quero does not currently generate the highest returns, we have compiled a list of companies that currently generate more than 25% return on equity. look at this free list here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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