We're Watching These Trends At Companhia Energética do Rio Grande do Norte - COSERN (BVMF:CSRN3)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Companhia Energética do Rio Grande do Norte - COSERN (BVMF:CSRN3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.13 = R$485m ÷ (R$4.5b - R$604m) (Based on the trailing twelve months to September 2020).

So, Companhia Energética do Rio Grande do Norte - COSERN has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electric Utilities industry average of 11%.

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'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?

When we looked at the ROCE trend at Companhia Energética do Rio Grande do Norte - COSERN, we didn't gain much confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 13%. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

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

Bringing it all together, while we're somewhat encouraged by Companhia Energética do Rio Grande do Norte - COSERN's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 161% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Companhia Energética do Rio Grande do Norte - COSERN does come with some risks, and we've found 2 warning signs that you should be aware of.

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