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

What trends should we look for it we want to identify stocks that can 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

Understanding Return On Capital Employed (ROCE)

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)

0.12 = R$1.2b ÷ (R$12b - R$1.5b) (Based on the trailing twelve months to September 2020).

Thus, Companhia de Saneamento de Minas Gerais has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.6% 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

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 183% whilst employing roughly the same amount of capital. 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.

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

As discussed above, Companhia de Saneamento de Minas Gerais appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 2 warning signs for Companhia de Saneamento de Minas Gerais you'll probably want to know about.

While Companhia de Saneamento de Minas Gerais isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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