Aeris Indústria e Comércio de Equipamentos para Geração de Energia's (BVMF:AERI3) Returns On Capital Not Reflecting Well On The Business

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.11 = R$265m ÷ (R$4.0b - R$1.7b) (Based on the trailing twelve months to December 2023).

So, Aeris Indústria e Comércio de Equipamentos para Geração de Energia has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 9.2% it's much better.

View 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'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 Does the ROCE Trend For Aeris Indústria e Comércio de Equipamentos para Geração de Energia Tell Us?

In terms of Aeris Indústria e Comércio de Equipamentos para Geração de Energia's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 40%, but since then they've fallen to 11%. However it looks like Aeris Indústria e Comércio de Equipamentos para Geração de Energia might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 42%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 11%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

In summary, Aeris Indústria e Comércio de Equipamentos para Geração de Energia is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Moreover, since the stock has crumbled 93% over the last three years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Aeris Indústria e Comércio de Equipamentos para Geração de Energia has the makings of a multi-bagger.

One final note, you should learn about the 3 warning signs we've spotted with Aeris Indústria e Comércio de Equipamentos para Geração de Energia (including 2 which shouldn't be ignored) .

If you want to search for solid companies with great earnings, check out this free 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 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.