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

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher 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?

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 Cogna Educação:

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

0.028 = R$635m ÷ (R$26b - R$3.1b) (Based on the trailing twelve months to March 2023).

Thus, Cogna Educação has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 8.2%.

View 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?

On the surface, the trend of ROCE at Cogna Educação doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.8% from 9.3% 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

To conclude, we've found that Cogna Educação is reinvesting in the business, but returns have been falling. Moreover, since the stock has crumbled 72% over the last five years, it appears investors are expecting the worst. 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.

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 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.