Companhia Energética do Rio Grande do Norte - COSERN (BVMF:CSRN3) Knows How To Allocate Capital Effectively

There are a few key trends to look for if we want to identify the next 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. 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 the ROCE trend of Companhia Energética do Rio Grande do Norte - COSERN (BVMF:CSRN3) we really liked what we saw.

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 Energética do Rio Grande do Norte - COSERN, this is the formula:

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

0.24 = R$1.0b ÷ (R$5.8b - R$1.5b) (Based on the trailing twelve months to September 2023).

So, Companhia Energética do Rio Grande do Norte - COSERN has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Electric Utilities industry average of 12%.

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 Can We Tell From Companhia Energética do Rio Grande do Norte - COSERN's ROCE Trend?

We like the trends that we're seeing from Companhia Energética do Rio Grande do Norte - COSERN. The data shows that returns on capital have increased substantially over the last five years to 24%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 98%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Companhia Energética do Rio Grande do Norte - COSERN has. And a remarkable 210% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know about the risks facing Companhia Energética do Rio Grande do Norte - COSERN, we've discovered 3 warning signs that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.