Companhia de Saneamento de Minas Gerais (BVMF:CSMG3) Is Doing The Right Things To Multiply Its Share Price

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Companhia de Saneamento de Minas Gerais (BVMF:CSMG3) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Companhia de Saneamento de Minas Gerais, this is the formula:

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

0.11 = R$1.1b ÷ (R$13b - R$2.0b) (Based on the trailing twelve months to September 2021).

Therefore, Companhia de Saneamento de Minas Gerais has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Water Utilities industry.

Check out our latest analysis for Companhia de Saneamento de Minas Gerais

In the above chart we have measured Companhia de Saneamento de Minas Gerais' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Companhia de Saneamento de Minas Gerais here for free.

What The Trend Of ROCE Can Tell Us

Companhia de Saneamento de Minas Gerais' ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 87% 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. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In Conclusion...

In summary, we're delighted to see that Companhia de Saneamento de Minas Gerais has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 92% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Companhia de Saneamento de Minas Gerais, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.

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.

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