Investors Met With Slowing Returns on Capital At Cogna Educação (BVMF:COGN3)

If you're looking for a multi-bagger, there's a few things to 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Cogna Educação (BVMF:COGN3) 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?

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. The formula for this calculation on Cogna Educação is:

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

0.035 = R$757m ÷ (R$25b - R$3.7b) (Based on the trailing twelve months to December 2023).

Therefore, Cogna Educação has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 9.5%.

Check out our latest analysis for Cogna Educação

In the above chart we have measured Cogna Educação'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 analyst report for Cogna Educação .

What The Trend Of ROCE Can Tell Us

Over the past five years, Cogna Educação's ROCE has remained relatively flat while the business is using 27% less capital than before. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

The Key Takeaway

It's a shame to see that Cogna Educação is effectively shrinking in terms of its capital base. Moreover, since the stock has crumbled 76% over the last five years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Cogna Educação has the makings of a multi-bagger.

On a final note, we've found 1 warning sign for Cogna Educação that we think you should be aware of.

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.