Vasta Platform (NASDAQ:VSTA) Will Be Hoping To Turn Its Returns On Capital Around
When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at Vasta Platform (NASDAQ:VSTA), we've spotted some signs that it could be struggling, so let's investigate.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Vasta Platform, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.022 = R$134m ÷ (R$7.4b - R$1.4b) (Based on the trailing twelve months to December 2023).
Thus, Vasta Platform has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 7.7%.
See our latest analysis for Vasta Platform
Above you can see how the current ROCE for Vasta Platform compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Vasta Platform for free.
How Are Returns Trending?
In terms of Vasta Platform's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 3.2% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Vasta Platform to turn into a multi-bagger.
In Conclusion...
In summary, it's unfortunate that Vasta Platform is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 59% from where it was three years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
While Vasta Platform doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for VSTA on our platform.
While Vasta Platform may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. 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 stocks mentioned.
