Be Wary Of Cruzeiro do Sul Educacional (BVMF:CSED3) And Its Returns On Capital

What trends should we look for it we want to identify stocks that can 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Cruzeiro do Sul Educacional (BVMF:CSED3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Cruzeiro do Sul Educacional is:

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

0.10 = R$387m ÷ (R$4.7b - R$933m) (Based on the trailing twelve months to September 2023).

Therefore, Cruzeiro do Sul Educacional has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 8.8% generated by the Consumer Services industry.

Check out our latest analysis for Cruzeiro do Sul Educacional

Above you can see how the current ROCE for Cruzeiro do Sul Educacional compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

On the surface, the trend of ROCE at Cruzeiro do Sul Educacional doesn't inspire confidence. To be more specific, ROCE has fallen from 17% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

While returns have fallen for Cruzeiro do Sul Educacional in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 22% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

Cruzeiro do Sul Educacional does have some risks though, and we've spotted 1 warning sign for Cruzeiro do Sul Educacional that you might be interested in.

While Cruzeiro do Sul Educacional 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.