Companhia de Saneamento de Minas Gerais (BVMF:CSMG3) Might Have The Makings Of A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

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 de Saneamento de Minas Gerais is:

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

0.15 = R$2.0b ÷ (R$15b - R$1.5b) (Based on the trailing twelve months to September 2024).

Therefore, Companhia de Saneamento de Minas Gerais has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Water Utilities industry.

See 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Companhia de Saneamento de Minas Gerais .

How Are Returns Trending?

Companhia de Saneamento de Minas Gerais is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 15%. The amount of capital employed has increased too, by 35%. 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.

The Bottom Line On Companhia de Saneamento de Minas Gerais' ROCE

In summary, it's great to see that Companhia de Saneamento de Minas Gerais can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 89% 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. In light of that, we think it's worth looking further into this stock because if Companhia de Saneamento de Minas Gerais can keep these trends up, it could have a bright future ahead.

Companhia de Saneamento de Minas Gerais does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.

While Companhia de Saneamento de Minas Gerais may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.