Cruzeiro do Sul Educacional (BVMF:CSED3) Is Reinvesting At Lower Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Cruzeiro do Sul Educacional (BVMF:CSED3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

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)

0.074 = R$317m ÷ (R$4.9b - R$634m) (Based on the trailing twelve months to March 2022).

Thus, Cruzeiro do Sul Educacional has an ROCE of 7.4%. In absolute terms, that's a low return but it's around the Consumer Services industry average of 7.8%.

View our latest analysis for Cruzeiro do Sul Educacional

In the above chart we have measured Cruzeiro do Sul Educacional's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Cruzeiro do Sul Educacional.

So How Is Cruzeiro do Sul Educacional's ROCE Trending?

When we looked at the ROCE trend at Cruzeiro do Sul Educacional, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.4% from 22% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Cruzeiro do Sul Educacional's reinvestment in its own business, we're aware that returns are shrinking. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 80% in the last year. Therefore based on the analysis done in this article, we don't think Cruzeiro do Sul Educacional has the makings of a multi-bagger.

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.

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.

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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.