Some Investors May Be Worried About Aeris Indústria e Comércio de Equipamentos para Geração de Energia's (BVMF:AERI3) Returns On 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. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Aeris Indústria e Comércio de Equipamentos para Geração de Energia (BVMF:AERI3), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.052 = R$111m ÷ (R$3.7b - R$1.5b) (Based on the trailing twelve months to June 2024).

Thus, Aeris Indústria e Comércio de Equipamentos para Geração de Energia has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Electrical industry average of 8.8%.

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

Above you can see how the current ROCE for Aeris Indústria e Comércio de Equipamentos para Geração de Energia compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst 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 34%, but since then they've fallen to 5.2%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a separate but related note, it's important to know that Aeris Indústria e Comércio de Equipamentos para Geração de Energia has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

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

From the above analysis, we find it rather worrisome that returns on capital and sales for Aeris Indústria e Comércio de Equipamentos para Geração de Energia have fallen, meanwhile the business is employing more capital than it was five years ago. Unsurprisingly then, the stock has dived 95% over the last three years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Aeris Indústria e Comércio de Equipamentos para Geração de Energia (including 3 which make us uncomfortable) .

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.