Here's What To Make Of Companhia de Saneamento Básico do Estado de São Paulo - SABESP's (BVMF:SBSP3) Decelerating Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BVMF:SBSP3), it didn't seem to tick all of these boxes.

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 de Saneamento Básico do Estado de São Paulo - SABESP:

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

0.095 = R$4.3b ÷ (R$51b - R$5.9b) (Based on the trailing twelve months to June 2021).

Therefore, Companhia de Saneamento Básico do Estado de São Paulo - SABESP has an ROCE of 9.5%. On its own, that's a low figure but it's around the 8.4% average generated by the Water Utilities industry.

Check out our latest analysis for Companhia de Saneamento Básico do Estado de São Paulo - SABESP

In the above chart we have measured Companhia de Saneamento Básico do Estado de São Paulo - SABESP's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Companhia de Saneamento Básico do Estado de São Paulo - SABESP.

What Can We Tell From Companhia de Saneamento Básico do Estado de São Paulo - SABESP's ROCE Trend?

In terms of Companhia de Saneamento Básico do Estado de São Paulo - SABESP's historical ROCE trend, it doesn't exactly demand attention. The company has employed 47% more capital in the last five years, and the returns on that capital have remained stable at 9.5%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Companhia de Saneamento Básico do Estado de São Paulo - SABESP's ROCE

As we've seen above, Companhia de Saneamento Básico do Estado de São Paulo - SABESP's returns on capital haven't increased but it is reinvesting in the business. And with the stock having returned a mere 40% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a separate note, we've found 1 warning sign for Companhia de Saneamento Básico do Estado de São Paulo - SABESP you'll probably want to know about.

While Companhia de Saneamento Básico do Estado de São Paulo - SABESP may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

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