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

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Companhia Energética do Rio Grande do Norte - COSERN:

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

0.24 = R$976m ÷ (R$5.4b - R$1.4b) (Based on the trailing twelve months to March 2023).

So, Companhia Energética do Rio Grande do Norte - COSERN has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

Check out 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.

So How Is Companhia Energética do Rio Grande do Norte - COSERN's ROCE Trending?

Companhia Energética do Rio Grande do Norte - COSERN is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 24%. The amount of capital employed has increased too, by 122%. So we're very much inspired by what we're seeing at Companhia Energética do Rio Grande do Norte - COSERN thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 25%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Companhia Energética do Rio Grande do Norte - COSERN has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Companhia Energética do Rio Grande do Norte - COSERN's ROCE

In summary, it's great to see that Companhia Energética do Rio Grande do Norte - COSERN can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a solid 85% 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 though, and we've spotted 3 warning signs for Companhia Energética do Rio Grande do Norte - COSERN that you might be interested in.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.