Companhia de Saneamento de Minas Gerais (BVMF:CSMG3) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can 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. Speaking of which, we noticed some great changes in Companhia de Saneamento de Minas Gerais' (BVMF:CSMG3) returns on capital, so let's have a look.

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. The formula for this calculation on Companhia de Saneamento de Minas Gerais is:

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%. That's a relatively normal return on capital, and it's around the 9.6% 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 Can We Tell From Companhia de Saneamento de Minas Gerais' ROCE Trend?

Companhia de Saneamento de Minas Gerais is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 87% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In Conclusion...

To bring it all together, Companhia de Saneamento de Minas Gerais has done well to increase the returns it's generating from its capital employed. Considering the stock has delivered 22% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

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.