Some Investors May Be Worried About Aeris Indústria e Comércio de Equipamentos para Geração de Energia's (BVMF:AERI3) Returns On Capital

There are a few key trends to look for if we want to identify the next 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Aeris Indústria e Comércio de Equipamentos para Geração de Energia (BVMF:AERI3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. 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)

0.086 = R$207m ÷ (R$3.5b - R$1.0b) (Based on the trailing twelve months to September 2022).

Therefore, Aeris Indústria e Comércio de Equipamentos para Geração de Energia has an ROCE of 8.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.8%.

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'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.

How Are Returns Trending?

In terms of Aeris Indústria e Comércio de Equipamentos para Geração de Energia's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 25% 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'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.

What We Can Learn From Aeris Indústria e Comércio de Equipamentos para Geração de Energia's ROCE

To conclude, we've found that Aeris Indústria e Comércio de Equipamentos para Geração de Energia is reinvesting in the business, but returns have been falling. Moreover, since the stock has crumbled 87% over the last year, it appears investors are expecting the worst. 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.

If you'd like to know about the risks facing Aeris Indústria e Comércio de Equipamentos para Geração de Energia, we've discovered 3 warning signs that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.