There Are Reasons To Feel Uneasy About Aeris Indústria e Comércio de Equipamentos para Geração de Energia's (BVMF:AERI3) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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.

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

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. Analysts use this formula to calculate it for Aeris Indústria e Comércio de Equipamentos para Geração de Energia:

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

0.14 = R$277m ÷ (R$3.2b - R$1.2b) (Based on the trailing twelve months to June 2023).

So, Aeris Indústria e Comércio de Equipamentos para Geração de Energia has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.8% generated by the Electrical industry.

View 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'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.

What Does the ROCE Trend For Aeris Indústria e Comércio de Equipamentos para Geração de Energia 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 33%, but since then they've fallen to 14%. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 38%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 14%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line On Aeris Indústria e Comércio de Equipamentos para Geração de Energia's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Aeris Indústria e Comércio de Equipamentos para Geração de Energia is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 60% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to know some of the risks facing Aeris Indústria e Comércio de Equipamentos para Geração de Energia we've found 3 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

While Aeris Indústria e Comércio de Equipamentos para Geração de Energia may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.