Companhia Catarinense de Águas e Saneamento - CASAN (BVMF:CASN3) Has Some Way To Go To Become A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after investigating Companhia Catarinense de Águas e Saneamento - CASAN (BVMF:CASN3), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Companhia Catarinense de Águas e Saneamento - CASAN:

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

0.074 = R$255m ÷ (R$3.9b - R$437m) (Based on the trailing twelve months to March 2022).

Therefore, Companhia Catarinense de Águas e Saneamento - CASAN has an ROCE of 7.4%. In absolute terms, that's a low return but it's around the Water Utilities industry average of 8.2%.

See our latest analysis for Companhia Catarinense de Águas e Saneamento - CASAN

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Companhia Catarinense de Águas e Saneamento - CASAN's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Companhia Catarinense de Águas e Saneamento - CASAN's ROCE Trending?

The returns on capital haven't changed much for Companhia Catarinense de Águas e Saneamento - CASAN in recent years. Over the past five years, ROCE has remained relatively flat at around 7.4% and the business has deployed 32% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Companhia Catarinense de Águas e Saneamento - CASAN's ROCE

In summary, Companhia Catarinense de Águas e Saneamento - CASAN has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 73% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to know some of the risks facing Companhia Catarinense de Águas e Saneamento - CASAN we've found 3 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

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.