Low profitability and external environment are collapsing at StoneCo (NASDAQ: STNE)

Band Stjepan Kalinic

This article first appeared on Simply Wall St News.

When it comes to volatility, young companies in turbulent industries are unmatched at making or breaking a bank. After an annual high of US $ 95, StoneCo (NASDAQ: STNE) is now trading near an all-time low at US $ 17.

Despite increasing growth and profitability, negative external developments and policy changes are scaring investors.

See our latest review for StoneCo.

Third Quarter 2021 Results

  • Loss of R $ 4.05 per share (down from R $ 0.87 profit in Q3 2020)
  • Income: BRL 1.42 billion (up 56% compared to Q3 2020)
  • Net loss: BRL 1.25 billion (down BRL 1.51 billion compared to Q3 2020 profit)

Revenue topped analysts ‘estimates by 2.5%, but earnings per share (EPS) missed analysts’ estimates. Over the next year, sales are expected to increase by 83%, compared to an expected growth of 21% for the industry in the United States. Over the past 3 years, on average, earnings per share have increased by 11% per year, but its stock price has fallen by 8% per year, which means it is significantly behind its earnings.

As usual, emerging markets like Brazil are a polarizing story. On the one hand, we have a promise of growth; on the other – a history of macroeconomic turmoil and political risk.

Currently, 2 notable problems impact the fundamentals

  • Defective registry system: Stone relied on a bad debt register which led to the discovery of unsecured loans which resulted in increased provisions. And an adjustment of BRL 397.2 million. In addition, the company must now reduce the number of loans, which leads to opportunity costs.
  • Limit on transaction fees: Brazil’s central bank is propose to revise a resolution regarding interchange fees for debit cards, as the current one only imposed the 0.5% cap on those who offer a deposit account, i.e. banks. While Stone’s exposure is unlikely to be substantial, the policy shifts in emerging markets are enough to raise some eyebrows.

Understanding Return on Capital Employed (ROCE)

If we are to find multi-bagger potential, there are often underlying trends that can provide clues. Ideally, a business will exhibit two trends: growth to return to on capital employed (ROCE) and an increase quantity capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities.

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. Analysts use this formula to calculate it for StoneCo:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.039 = 778 million reais ÷ (40 billion reais – 20 billion reais) (Based on the last twelve months up to September 2021).

Thereby, StoneCo has a ROCE of 3.9%. In absolute terms, this is a low return, and it is also below the IT industry average of 14%.

NasdaqGS: STNE Return on Capital Employee 23 November 2021

Above you can see how StoneCo’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you are interested, you can view analyst forecasts in our free business analyst forecast report.

What the ROCE trend can tell us

As for StoneCo’s historic ROCE trend, it doesn’t exactly demand attention. The company has steadily gained 3.9% over the past four years and the capital employed within the company has increased by 770% during this period. This low ROCE does not inspire confidence at the moment, and with the increase in capital employed, it is evident that the company is not deploying the funds in high return investments.

One more thing to note, although ROCE has remained relatively stable over the past four years, reducing current liabilities to 50% of total assets is good to see from a business owner’s perspective. business. This can eliminate some of the risks inherent in operations, as the company has fewer outstanding obligations to its suppliers and / or short-term creditors than before. While the current liability is still 50%, some of that risk is still present.

Our opinion on StoneCo

In conclusion, StoneCo invested more capital in the business, but the returns on that capital did not increase. Given that the stock has fallen 22% over the past three years, investors may not be overly optimistic that this trend will improve.

However, all is not pessimistic, because the Linx merger earlier this year contributed to recurring revenue and 15% organic growth. It’s also worth mentioning that Berkshire Hathaway owns a 3.46% stake in the company worth R $ 182million, not through Warren Buffett but through his potential successor, Todd Combs.

On a final note, we found 1 warning sign for StoneCo that we think you should be aware of.

While StoneCo does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.

Simply Wall St analyst Stjepan Kalinic and Simply Wall St do not have any position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Shirlene J. Manley