Be Wary Of Aeris Indústria e Comércio de Equipamentos para Geração de Energia (BVMF:AERI3) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

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. The formula for this calculation on Aeris Indústria e Comércio de Equipamentos para Geração de Energia is:

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

0.087 = R$208m ÷ (R$3.1b - R$710m) (Based on the trailing twelve months to December 2021).

So, Aeris Indústria e Comércio de Equipamentos para Geração de Energia has an ROCE of 8.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.7%.

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, you can check out the forecasts from the analysts covering Aeris Indústria e Comércio de Equipamentos para Geração de Energia here for free.

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. Around five years ago the returns on capital were 22%, but since then they've fallen to 8.7%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Aeris Indústria e Comércio de Equipamentos para Geração de Energia has decreased its current liabilities to 23% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

Our Take On Aeris Indústria e Comércio de Equipamentos para Geração de Energia's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Aeris Indústria e Comércio de Equipamentos para Geração de Energia. These growth trends haven't led to growth returns though, since the stock has fallen 49% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Aeris Indústria e Comércio de Equipamentos para Geração de Energia does have some risks, we noticed 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.