We Like These Underlying Return On Capital Trends At Cogna Educação (BVMF:COGN3)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Cogna Educação (BVMF:COGN3) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.04 = R$857m ÷ (R$24b - R$2.6b) (Based on the trailing twelve months to September 2024).

Thus, Cogna Educação has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 11%.

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're interested, you can view the analysts predictions in our free analyst report for Cogna Educação .

The Trend Of ROCE

While the ROCE is still rather low for Cogna Educação, we're glad to see it heading in the right direction. The data shows that returns on capital have increased by 34% over the trailing five years. The company is now earning R$0.04 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 30% less capital than it was five years ago. Cogna Educação may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

Our Take On Cogna Educação's ROCE

In the end, Cogna Educação has proven it's capital allocation skills are good with those higher returns from less amount of capital. Although the company may be facing some issues elsewhere since the stock has plunged 86% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

One more thing to note, we've identified 1 warning sign with Cogna Educação and understanding it should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.