Returns On Capital Are A Standout For Companhia Energética do Rio Grande do Norte - COSERN (BVMF:CSRN3)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. With that in mind, the ROCE of Companhia Energética do Rio Grande do Norte - COSERN (BVMF:CSRN3) looks great, so lets see what the trend can tell us.

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

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. 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)

0.20 = R$729m ÷ (R$5.2b - R$1.6b) (Based on the trailing twelve months to December 2021).

Thus, Companhia Energética do Rio Grande do Norte - COSERN has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

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

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Companhia Energética do Rio Grande do Norte - COSERN's past further, check out 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?

The trends we've noticed at Companhia Energética do Rio Grande do Norte - COSERN are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 20%. 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 112%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Key Takeaway

To sum it up, Companhia Energética do Rio Grande do Norte - COSERN has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 54% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Companhia Energética do Rio Grande do Norte - COSERN can keep these trends up, it could have a bright future ahead.

Companhia Energética do Rio Grande do Norte - COSERN does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.