Companhia Brasileira de Alumínio (BVMF:CBAV3) Is Looking To Continue Growing Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Companhia Brasileira de Alumínio (BVMF:CBAV3) and its trend of ROCE, we really liked what we saw.

What Is 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. The formula for this calculation on Companhia Brasileira de Alumínio is:

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

0.19 = R$2.0b ÷ (R$12b - R$1.8b) (Based on the trailing twelve months to June 2022).

Thus, Companhia Brasileira de Alumínio has an ROCE of 19%. In isolation, that's a pretty standard return but against the Metals and Mining industry average of 26%, it's not as good.

See our latest analysis for Companhia Brasileira de Alumínio

Above you can see how the current ROCE for Companhia Brasileira de Alumínio 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 Companhia Brasileira de Alumínio here for free.

How Are Returns Trending?

Companhia Brasileira de Alumínio is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 499% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line

To bring it all together, Companhia Brasileira de Alumínio has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last year the stock has only returned 6.6% to shareholders. So with that in mind, we think the stock deserves further research.

If you'd like to know more about Companhia Brasileira de Alumínio, we've spotted 2 warning signs, and 1 of them is potentially serious.

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.