Here's What's Concerning About Companhia de Saneamento Básico do Estado de São Paulo - SABESP's (BVMF:SBSP3) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BVMF:SBSP3), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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 de Saneamento Básico do Estado de São Paulo - SABESP is:

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

0.084 = R$4.1b ÷ (R$54b - R$4.8b) (Based on the trailing twelve months to June 2022).

So, Companhia de Saneamento Básico do Estado de São Paulo - SABESP has an ROCE of 8.4%. Even though it's in line with the industry average of 8.2%, it's still a low return by itself.

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.

How Are Returns Trending?

In terms of Companhia de Saneamento Básico do Estado de São Paulo - SABESP's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. However it looks like Companhia de Saneamento Básico do Estado de São Paulo - SABESP 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.

Our Take On Companhia de Saneamento Básico do Estado de São Paulo - SABESP's ROCE

To conclude, we've found that Companhia de Saneamento Básico do Estado de São Paulo - SABESP is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 65% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching Companhia de Saneamento Básico do Estado de São Paulo - SABESP, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.

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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.