Pet Center Comércio e Participações (BVMF: PETZ3) hopes to turn its returns into capital

To find a multi-bagger stock, what underlying trends should we look for in a company? Among other things, we will want to see two things; first, growth return on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. However, after briefly looking at the numbers, we don’t think Pet Center Comercio e Participações (BVM: PETZ3) has the makings of a multi-bagger in the future, but let’s see why it might be.

What is return on capital employed (ROCE)?

If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. Analysts use this formula to calculate it for Pet Center Comercio e Participações:

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

0.048 = R$139 million ÷ (R$3.6 billion – R$682 million) (Based on the last twelve months to September 2022).

then, Pet Center Comercio e Participações has a ROCE of 4.8%. Ultimately, this is a poor return and is below the specialty retail industry average of 9.2%.

Check out our latest review for Pet Center Comercio e Participações

Above, you can see how Pet Center Comercio e Participações’ current ROCE compares to its past returns on capital, but there’s little you can say about the past. If you wish, you can consult the forecasts of analysts covering Pet Center Comercio e Participações here to free.

What can we say about the ROCE trend of the Pet Center Comercio e Participações?

On the surface, the ROCE trend at the Pet Center Comercio e Participações does not inspire confidence. To be more specific, ROCE has fallen by 9.5% 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. And if the capital increase generates additional returns, the company and therefore the shareholders will benefit in the long term.

Similarly, Pet Center Comercio e Participações reduced its current liabilities to 19% of total assets. So we could tie some of that to the decline in ROCE. Additionally, it may reduce some aspects of risk to the business, as the business’s suppliers or short-term creditors now fund less of its operations. 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 ROCE.

The Key Takeaway

In summary, despite lower returns in the short term, we are encouraged to see that Pet Center Comercio e Participações is reinvesting for growth and has thus increased its sales. And there could be an opportunity here if other metrics look good too, as the stock is down 60% in the past year. So we think it would be worth taking a closer look at this stock as the trends look encouraging.

Pet Center Comercio e Participações, however, involves certain risks, we have found 4 warning signs in our investment analysis, and 1 of them should not be ignored…

Although Pet Center Comercio e Participações 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 listhere.

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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.