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

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Cogna Educação (BVMF:COGN3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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

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

0.016 = R$356m ÷ (R$26b - R$3.9b) (Based on the trailing twelve months to September 2022).

Thus, Cogna Educação has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 8.6%.

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

What Can We Tell From Cogna Educação's ROCE Trend?

In terms of Cogna Educação's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.6% from 13% five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Cogna Educação's ROCE

In summary, Cogna Educação is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 85% in 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.

Cogna Educação could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Cogna Educação isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.