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. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Companhia de Saneamento de Minas Gerais (BVMF:CSMG3) so let's look a bit deeper.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.14 = R$1.7b ÷ (R$14b - R$1.9b) (Based on the trailing twelve months to March 2024).

So, Companhia de Saneamento de Minas Gerais has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 12% generated by the Water Utilities industry.

View our latest analysis for Companhia de Saneamento de Minas Gerais

Above you can see how the current ROCE for Companhia de Saneamento de Minas Gerais 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 de Saneamento de Minas Gerais for free.

The Trend Of ROCE

Investors would be pleased with what's happening at Companhia de Saneamento de Minas Gerais. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 14%. The amount of capital employed has increased too, by 23%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In Conclusion...

To sum it up, Companhia de Saneamento de Minas Gerais has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 60% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

Companhia de Saneamento de Minas Gerais does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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.

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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.

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