The Return Trends At Companhia de Saneamento de Minas Gerais (BVMF:CSMG3) Look Promising

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Companhia de Saneamento de Minas Gerais (BVMF:CSMG3) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.12 = R$1.3b ÷ (R$12b - R$1.4b) (Based on the trailing twelve months to December 2020).

Therefore, 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 8.9% 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

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

Companhia de Saneamento de Minas Gerais is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 282% over the last five years. 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 Key Takeaway

To sum it up, Companhia de Saneamento de Minas Gerais is collecting higher returns from the same amount of capital, and that's impressive. 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.

Like most companies, Companhia de Saneamento de Minas Gerais does come with some risks, and we've found 2 warning signs that you should be aware of.

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.

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