Returns On Capital Signal Tricky Times Ahead For Cruzeiro do Sul Educacional (BVMF:CSED3)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Although, when we looked at Cruzeiro do Sul Educacional (BVMF:CSED3), it didn't seem to tick all of these boxes.

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 Cruzeiro do Sul Educacional:

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

0.077 = R$312m ÷ (R$4.7b - R$657m) (Based on the trailing twelve months to December 2022).

So, Cruzeiro do Sul Educacional has an ROCE of 7.7%. Even though it's in line with the industry average of 8.2%, it's still a low return by itself.

View 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'd like, you can check out the forecasts from the analysts covering Cruzeiro do Sul Educacional here for free.

How Are Returns Trending?

In terms of Cruzeiro do Sul Educacional's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 24%, but since then they've fallen to 7.7%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Cruzeiro do Sul Educacional has done well to pay down its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Cruzeiro do Sul Educacional's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Cruzeiro do Sul Educacional is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 42% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing, we've spotted 3 warning signs facing Cruzeiro do Sul Educacional that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.