Returns On Capital At Cogna Educação (BVMF:COGN3) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Cogna Educação (BVMF:COGN3), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Cogna Educação:

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

0.0031 = R$77m ÷ (R$29b - R$4.1b) (Based on the trailing twelve months to December 2021).

Therefore, Cogna Educação has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 8.2%.

See 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, you can check out the forecasts from the analysts covering Cogna Educação here for free.

The Trend Of ROCE

When we looked at the ROCE trend at Cogna Educação, we didn't gain much confidence. Around five years ago the returns on capital were 9.4%, but since then they've fallen to 0.3%. However it looks like Cogna Educação might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

Our Take On Cogna Educação's ROCE

Bringing it all together, while we're somewhat encouraged by Cogna Educação's reinvestment in its own business, we're aware that returns are shrinking. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 76% over the last five years. Therefore based on the analysis done in this article, we don't think Cogna Educação has the makings of a multi-bagger.

If you'd like to know about the risks facing Cogna Educação, we've discovered 1 warning sign that 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.