The Returns On Capital At Aeris Indústria e Comércio de Equipamentos para Geração de Energia (BVMF:AERI3) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.087 = R$213m ÷ (R$3.8b - R$1.3b) (Based on the trailing twelve months to December 2022).

Thus, 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 8.8%.

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.

How Are Returns Trending?

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 26%, but since then they've fallen to 8.7%. 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.

The Bottom Line

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. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 74% over the last year. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to continue researching Aeris Indústria e Comércio de Equipamentos para Geração de Energia, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.