Be wary of Locaweb Serviços de Internet (BVMF:LWSA3) and its capital gains

If we’re looking to identify the next multi-bagger, there are a few key trends to look for. We would like to see something proven first to return increasing capital employed (ROCE), secondly, to expansion main of capital employed. This shows us that it is a sophisticated machine that can continuously reinvest its profits back into the business and generate higher returns. In light of this, when we look at Locaweb Services de Internet (BVMF:LWSA3) and its ROCE trend doesn’t exactly excite us.

What is return on capital employed (ROCE)?

For those who aren’t sure what ROCE is, it measures the amount of pre-tax profit a company can make on the capital it uses in its business. Here is the formula to calculate this metric for Locaweb Serviços de Internet:

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

0.015 = R$53m ÷ (R$4.6b – R$987m) (Based on twelve months after September 2022).

Therefore, Locaweb Serviços de Internet has a ROCE of 1.5%. In absolute terms, this is a low return and also undercuts the IT industry average of 16%.

Check out our latest review for Locaweb Serviços de Internet

BOVESPA:LWSA3 Return on Capital Employed January 8, 2023

Above you can see how the current ROCE for Locaweb Serviços de Internet compares to past returns on equity, but there’s only so much you can tell from the past. If you like, you can see analysts’ forecasts covering Locaweb Serviços de Internet here. for free.

How Are Returns Trending?

On the surface, the ROCE trend at Locaweb Serviços de Internet does not inspire confidence. Over the past five years, returns on equity have fallen to 1.5% from 24% five years ago. However, given that both revenue and the amount of assets used in the business are increasing, this may indicate that the company is investing in growth and that the additional capital causes a short-term decrease in ROCE. If these investments are successful, it could bode very well for long-term stock performance.

Additionally, Locaweb Serviços de Internet has done well to pay its current liabilities to 21% of total assets. So we can attribute some of this to the decline in ROCE. In addition, it can reduce some aspects of risk to the business, as now the company’s suppliers or short-term creditors are less likely to finance its operations. Since the business basically funds more of its operations with its own cash, you could argue that this makes the business less efficient at generating ROCE.

Bottom line at Locaweb on the Internet’s ROCE service

In summary, despite low returns in the short term, we are encouraged to see Locaweb Serviços de Internet reinvesting for growth and resulting in higher sales. If other metrics look good, there could be an opportunity here, as the stock is down 34% in the past year. Consequently, we recommend further research into this fund to discover what other fundamentals the business can show us.

We found in the last note 2 warning signs for Locaweb Serviços de Internet (1 is a bit unpleasant) you should be aware.

If you want to look for solid companies with great earnings, check this out for free a list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. This is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. We aim to provide you with long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company listings or quality material. Simply Wall St has no position in the listed stocks.

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