Here's What's Concerning About Aeris Indústria e Comércio de Equipamentos para Geração de Energia's (BVMF:AERI3) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating Aeris Indústria e Comércio de Equipamentos para Geração de Energia (BVMF:AERI3), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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)

0.077 = R$184m ÷ (R$3.0b - R$570m) (Based on the trailing twelve months to September 2021).

So, Aeris Indústria e Comércio de Equipamentos para Geração de Energia has an ROCE of 7.7%. Ultimately, that's a low return and it under-performs the Electrical industry average of 16%.

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 report for Aeris Indústria e Comércio de Equipamentos para Geração de Energia.

So How Is Aeris Indústria e Comércio de Equipamentos para Geração de Energia's ROCE Trending?

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 23%, but since then they've fallen to 7.7%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Aeris Indústria e Comércio de Equipamentos para Geração de Energia has done well to pay down its current liabilities to 19% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

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

While returns have fallen for Aeris Indústria e Comércio de Equipamentos para Geração de Energia in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 41% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Aeris Indústria e Comércio de Equipamentos para Geração de Energia (of which 2 are significant!) that you should know about.

While Aeris Indústria e Comércio de Equipamentos para Geração de Energia isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.