Returns On Capital At Companhia de Saneamento de Minas Gerais (BVMF:CSMG3) Have Stalled

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Companhia de Saneamento de Minas Gerais (BVMF:CSMG3), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.099 = R$1.0b ÷ (R$12b - R$1.9b) (Based on the trailing twelve months to September 2022).

So, Companhia de Saneamento de Minas Gerais has an ROCE of 9.9%. On its own, that's a low figure but it's around the 8.6% average 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 to see what analysts are forecasting going forward, you should check out our free report for Companhia de Saneamento de Minas Gerais.

What Does the ROCE Trend For Companhia de Saneamento de Minas Gerais Tell Us?

Over the past five years, Companhia de Saneamento de Minas Gerais' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Companhia de Saneamento de Minas Gerais in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. This probably explains why Companhia de Saneamento de Minas Gerais is paying out 37% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

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

We can conclude that in regards to Companhia de Saneamento de Minas Gerais' returns on capital employed and the trends, there isn't much change to report on. Since the stock has gained an impressive 41% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know about the risks facing Companhia de Saneamento de Minas Gerais, we've discovered 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.