Aeris Indústria e Comércio de Equipamentos para Geração de Energia (BVMF:AERI3) May Have Issues Allocating Its Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Aeris Indústria e Comércio de Equipamentos para Geração de Energia (BVMF:AERI3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 Aeris Indústria e Comércio de Equipamentos para Geração de Energia, this is the formula:

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

0.072 = R$154m ÷ (R$3.5b - R$1.3b) (Based on the trailing twelve months to March 2024).

Thus, Aeris Indústria e Comércio de Equipamentos para Geração de Energia has an ROCE of 7.2%. In absolute terms, that's a low return but it's around the Electrical industry average of 8.8%.

Check out our latest analysis for Aeris Indústria e Comércio de Equipamentos para Geração de Energia

Above you can see how the current ROCE for Aeris Indústria e Comércio de Equipamentos para Geração de Energia compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Aeris Indústria e Comércio de Equipamentos para Geração de Energia .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Aeris Indústria e Comércio de Equipamentos para Geração de Energia doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.2% from 37% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

We're a bit apprehensive about Aeris Indústria e Comércio de Equipamentos para Geração de Energia because despite more capital being deployed in the business, returns on that capital and sales have both fallen. This could explain why the stock has sunk a total of 97% in the last three years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Aeris Indústria e Comércio de Equipamentos para Geração de Energia does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are a bit unpleasant...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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 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.

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