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

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Aeris Indústria e Comércio de Equipamentos para Geração de Energia (BVMF:AERI3) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.084 = R$199m ÷ (R$3.1b - R$746m) (Based on the trailing twelve months to March 2022).

Therefore, Aeris Indústria e Comércio de Equipamentos para Geração de Energia has an ROCE of 8.4%. On its own, that's a low figure but it's around the 8.6% average generated by the Electrical industry.

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

In the above chart we have measured Aeris Indústria e Comércio de Equipamentos para Geração de Energia's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

On the surface, the trend of ROCE at Aeris Indústria e Comércio de Equipamentos para Geração de Energia doesn't inspire confidence. To be more specific, ROCE has fallen from 23% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Aeris Indústria e Comércio de Equipamentos para Geração de Energia has decreased its current liabilities to 24% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Aeris Indústria e Comércio de Equipamentos para Geração de Energia's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 64% over the last year, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Aeris Indústria e Comércio de Equipamentos para Geração de Energia does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit concerning...

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.