Companhia Energética do Rio Grande do Norte - COSERN (BVMF:CSRN3) Will Be Hoping To Turn Its Returns On Capital Around

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Companhia Energética do Rio Grande do Norte - COSERN (BVMF:CSRN3), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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 Energética do Rio Grande do Norte - COSERN is:

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

0.12 = R$478m ÷ (R$4.6b - R$666m) (Based on the trailing twelve months to December 2020).

Therefore, Companhia Energética do Rio Grande do Norte - COSERN has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Electric Utilities industry.

Check out our latest analysis for Companhia Energética do Rio Grande do Norte - COSERN

Historical performance is a great place to start when researching a stock so above you can see the gauge for Companhia Energética do Rio Grande do Norte - COSERN's ROCE against it's prior returns. If you'd like to look at how Companhia Energética do Rio Grande do Norte - COSERN has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Companhia Energética do Rio Grande do Norte - COSERN Tell Us?

On the surface, the trend of ROCE at Companhia Energética do Rio Grande do Norte - COSERN doesn't inspire confidence. Over the last five years, returns on capital have decreased to 12% from 15% five years ago. However it looks like Companhia Energética do Rio Grande do Norte - COSERN might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Companhia Energética do Rio Grande do Norte - COSERN's ROCE

To conclude, we've found that Companhia Energética do Rio Grande do Norte - COSERN is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 103% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing, we've spotted 2 warning signs facing Companhia Energética do Rio Grande do Norte - COSERN that you might find interesting.

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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