Why We Like The Returns At Companhia Energética do Rio Grande do Norte - COSERN (BVMF:CSRN3)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

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. 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)

0.24 = R$967m ÷ (R$5.7b - R$1.7b) (Based on the trailing twelve months to June 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 13%.

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

Companhia Energética do Rio Grande do Norte - COSERN is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably 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 110%. 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.

Our Take 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. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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 come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

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.