Returns On Capital Are Showing Encouraging Signs At Companhia de Saneamento de Minas Gerais (BVMF:CSMG3)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. 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.

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. 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)

0.13 = R$1.3b ÷ (R$12b - R$1.7b) (Based on the trailing twelve months to March 2021).

Therefore, Companhia de Saneamento de Minas Gerais has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Water Utilities industry average of 8.2% it's much better.

Check out 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 report for Companhia de Saneamento de Minas Gerais.

How Are Returns Trending?

Companhia de Saneamento de Minas Gerais has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 221% 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.

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 a respectable 86% 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. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching Companhia de Saneamento de Minas Gerais, you might be interested to know about the 3 warning signs 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.

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